Global bond markets experienced fresh selling pressure and stock markets declined on Monday as oil prices jumped over 2% following a resumption of military attacks between the U.S. and Iran. The escalating geopolitical tensions heightened worries about inflation, which in turn increased the likelihood of further interest rate hikes from major central banks. Federal Reserve Chairman Kevin Warsh's speech at Jackson Hole on Friday significantly boosted bets on a September Fed rate increase, with fed funds futures traders now pricing in 65% odds of such a hike, up from around 35% before his comments.
Oil prices surged, with Brent crude futures rising $2.39, or 2.71%, to settle at $90.49 a barrel, reaching its highest level since August 25. U.S. West Texas Intermediate (WTI) crude climbed $2.36, or 2.83%, to settle at $85.76. This increase was driven by the U.S. attacking Iranian rocket launchers on Larak Island, and Iran retaliating by striking U.S. military targets in Jordan. Analysts like Stephen Innes of Quintex Intel noted that the situation in the Strait of Hormuz was once again threatening to put a floor under oil prices.
On Wall Street, major indexes closed lower, with the Dow Jones Industrial Average falling 374.09 points, or 0.70%, to 53,185.90. The S&P 500 declined by 25.62 points, or 0.33%, to 7,686.14, and the Nasdaq Composite dropped 31.53 points, or 0.12%, to 26,370.89. U.S. Treasury yields rose, with the benchmark 10-year Treasury note yield up 3.6 basis points at 4.758%, after touching 4.768%, its highest since January 15, 2025. Peter Cardillo, chief market economist at Spartan Capital Securities, commented that the market was beginning to feel the weight of climbing yields.
Asian stock markets also slipped, with Japan's Nikkei down 0.4% and South Korean stocks falling 0.1%. MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.6%. The U.S. dollar edged lower against a basket of currencies, while the dollar was 0.1% lower at 159.78 yen. Gold, typically seen as a safe-haven asset, fell 0.6% to $4,425 an ounce, having shed 3.2% on August 28 as yields spiked. The European Central Bank is also widely expected to hike rates when it meets on September 9 and 10.
Federal Reserve Chairman Kevin Warsh's hawkish tone at Jackson Hole, where he called the 3.7% inflation rate "concerning" and suggested current financial conditions were not "restrictive," played a significant role in market expectations. While some, like JPMorgan's Michael Feroli, still anticipate a hike in December, others, such as Barclays, now expect two 25 basis point rate hikes in both September and December. The focus will now shift to upcoming U.S. economic data, including jobs figures and the Consumer Price Index (CPI), to further guide Fed policy expectations.
