World stocks experienced a decline on Wednesday as fresh US airstrikes on Iranian military targets near the Strait of Hormuz, coupled with Tehran's reported retaliatory attacks on American assets, intensified geopolitical anxieties. This escalation pushed oil prices to five-week highs, with Brent crude futures jumping to $94.52 a barrel and US WTI futures hitting levels not seen since July, nearing $90 a barrel. The rising oil prices reignited inflation concerns, leading to a global bond selloff.
Global bond yields surged in response to the increased inflation worries and expectations of tighter monetary policy. The US 10-year Treasury yield climbed to 4.80%, reaching its highest level since January 2025, while the short-term 2-year yield rose to 4.40%. Borrowing costs in Japan reached their highest since August 1996, and Germany's benchmark yield hit a 2011 high. This bond market reaction signals investor anticipation that central banks, particularly the Federal Reserve, may need to hike interest rates further.
Adding to the hawkish sentiment, Fed Governor Michael Barr indicated he would support a rate hike if inflation does not moderate sufficiently, echoing previous statements from Fed Chair Kevin Warsh. Markets are now leaning towards a quarter-point rate hike this month, with the benchmark rate already at 3.50%-3.75%. European consumer prices, rising to 3.3% in August, also make a European Central Bank rate hike all but certain.
US President Donald Trump dismissed concerns about the conflict, stating the US has "almost total control" over the Strait of Hormuz and that Tehran's economy was collapsing. He downplayed the desire for a deal with Iran, reiterating a stance on hitting them hard. This geopolitical backdrop, combined with the surging oil prices and central bank hawkishness, created a risk-off environment, causing the S&P 500 index to fall 0.71% and the Nasdaq Composite to decline more than 1%.
