Key facts
- Asian shares declined as oil prices surged above $100 a barrel due to escalating Middle East conflict.
- The conflict threatens key shipping corridors, including the Red Sea and the Strait of Hormuz.
- Markets are repricing central bank policy, with increased expectations for hawkish stances and potential rate hikes.
- U.S. Treasury yields climbed, with 30-year yields nearing their highest levels since 2007.
- The U.S. dollar strengthened, while the Japanese yen weakened significantly against the dollar.
Asian shares declined as oil prices surged back above $100 a barrel amid an intensifying conflict in the Gulf, rattling bond markets and reviving fears of a fresh inflation shock. Brent crude held at $100.85 a barrel after a significant overnight surge, driven by attacks by Iran-aligned Houthis on Saudi tankers in the Red Sea, which, alongside Iran's actions near the Strait of Hormuz, have choked off crucial Middle East oil supply routes.
With the conflict showing no signs of abating, Brent crude has soared nearly 40% this month. Analysts noted that the threat to two of the world's busiest shipping corridors means markets are beginning to reassess the implications, potentially reversing recent drops that had given central banks room to ease policy. The news of higher U.S. tariffs on goods from 60 trading partners further exacerbated inflation concerns.
Markets are now betting that central banks will adopt more hawkish stances. There is a one-in-three chance of a rate hike from the Federal Reserve as soon as next week, with a September hike more than fully priced in. The European Central Bank left rates unchanged but a September rate hike is approximately 70% priced in.
In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan fell 1%, Japan’s Nikkei slid 2.9%, and South Korea's KOSPI dropped 3.7%. Nasdaq futures showed a slight increase, with Intel's results offering some support, but broader worries about oil and interest rates weighed on sentiment. Wall Street had fallen overnight after results from Alphabet and Tesla indicated significant spending on AI infrastructure.
Bond markets saw U.S. 10-year Treasury yields holding near an 18-month high, and 30-year yields nearing a 19-year peak. Higher Treasury yields supported the U.S. dollar, which rose to its highest level this month. The Japanese yen, however, was pinned near 40-year lows against the dollar, prompting a warning from the U.S. Treasury about undesirable volatility. Precious metals also declined, with gold and silver falling.