Asian stock markets experienced a downturn on Monday as investors reacted to escalating geopolitical tensions between the US and Iran, which propelled oil prices higher, and hawkish comments from Federal Reserve Chairman Kevin Warsh that intensified expectations for a US interest rate hike. Warsh's remarks at the Jackson Hole symposium indicated a strong commitment to fighting inflation, currently at 3.7%, nearly double the Fed's 2% target, and suggested that current financial conditions are not sufficiently restrictive. This spurred traders to increase the probability of a September rate increase to 57%, leading to a sharp rise in short-term Treasury yields and a flattening of the yield curve. Despite Warsh's refusal to definitively commit to a hike, his emphasis on the need for inflation to move "clearly and at sufficient speed" towards the objective left little doubt about the potential for higher borrowing costs.
The market movements saw Japan's Nikkei 225 fall by 1.6% to 65,361.60, South Korean stocks decline by 0.1%, and MSCI's broadest index of Asia-Pacific shares outside Japan drop by 0.6%. Tech firms, which often rely on borrowing for large investments, were particularly affected. US crude oil prices surged by 2.6% to $85.57 a barrel, and Brent North Sea Crude rose by 2.6% to $90.39 a barrel, following US attacks on Iranian rocket launchers and Iran's retaliatory strikes on US military targets in Jordan. Gold, typically a beneficiary of lower interest rates, fell by 0.6% to $4,425 an ounce.
US Treasury yields reflected the increased rate hike expectations, with two-year yields holding at 4.34% after jumping nearly 12 basis points on Friday. The yield on the benchmark US 10-year Treasury note rose by 3.6 basis points to 4.758%, reaching its highest level since January 15, 2025. Conversely, the US dollar saw a slight dip against the yen, trading at 159.78 yen, though still near its July top of 163.99. Analysts like Michael Feroli, chief US economist at JPMorgan, anticipate a hike in December but acknowledge that the September meeting is "live." Barclays now projects 25 basis point rate hikes in both September and December. The upcoming jobs report and consumer price index data will be crucial in shaping the Fed's decision-making process.
