Asian stock markets experienced declines on Monday as fresh conflict between the US and Iran pushed oil prices higher, while US bond yields remained elevated due to increased bets on a US rate hike. Brent crude futures climbed 2.7% to $90.51 a barrel after US forces struck Iranian launchers on Larak Island, prompting Iran to attack US forces in Jordan and claim a hit on a tanker in the Strait of Hormuz. US crude also rose 2.6% to $85.57 a barrel. This geopolitical tension, combined with higher oil prices, fueled concerns about persistent inflation and the likelihood of further interest rate increases from major central banks.
Federal Reserve Chair Kevin Warsh's hawkish speech on Friday emphasized the central bank's commitment to controlling inflation, leading markets to raise the probability of a September rate increase to 57%. This sentiment drove short-term Treasury yields sharply higher, flattening the yield curve. Two-year Treasury yields held at 4.34% after jumping almost 12 basis points on Friday, while 30-year bond yields were more contained at 5.208%. Analysts from JPMorgan and Barclays expect rate hikes, with Barclays forecasting 25 basis point increases in both September and December.
The higher yields and geopolitical stress negatively impacted Asian markets. Japan's Nikkei fell 0.4%, South Korean stocks lost 0.1%, and MSCI's broadest index of Asia-Pacific shares outside Japan declined 0.6%. Chinese blue chips eased 0.4% due to pressure on property developers following regulatory changes from Beijing. The yen also continued to weaken, sliding past 160 per US dollar again, despite analysts arguing a series of hikes is needed to shore it up. Gold prices fell 0.6% to $4,425 an ounce, having already shed 3.2% on Friday as yields spiked.
