Key facts
- Asian share markets declined amid rising oil prices and elevated bond yields.
- U.S. forces struck Iranian launchers, leading to reported Iranian attacks.
- Speculation of a U.S. rate hike increased after Federal Reserve Chair Warsh's comments.
- The yen weakened past 160 per dollar, prompting a meeting between U.S. Treasury Secretary and Bank of Japan head.
- Oil prices and Treasury yields rose, while major equity indices fell globally.
Share markets in Asia declined on Monday as renewed geopolitical tensions between the United States and Iran fueled a rise in oil prices, while elevated bond yields persisted due to increased expectations of a U.S. interest rate hike.
Brent crude futures climbed 1.4% to $89.38 a barrel after U.S. forces struck two Iranian launchers on Larak Island. Reports indicated Iran was attacking U.S. forces in Jordan, according to Fox News. This heightened risk to inflation kept bond markets on edge, especially after Federal Reserve Chair Kevin Warsh reiterated on Friday that the central bank must continue efforts to control inflation.
Market participants reacted by raising the probability of a September rate increase to 57%, causing short-term Treasury yields to jump and the yield curve to flatten. Michael Feroli, chief U.S. economist at JPMorgan, anticipates a rate hike in December but acknowledges the September meeting is a possibility, noting Warsh's willingness to translate inflation concerns into policy tightening.
Key upcoming data, including Friday's August payrolls report and consumer price data on September 11, will influence the timing of any rate hikes. Analysts forecast a rebound in job growth to 58,000 for August, with the unemployment rate expected to remain at 4.1%. A significantly weaker outcome would be needed to substantially reduce the likelihood of a September rate move.
The inflation threat is also expected to prompt New Zealand's central bank to raise rates for a second consecutive meeting this week. The Bank of Canada, however, is anticipated to maintain its current rate, considering the potential economic damage from a trade war with the U.S.
Higher yields, combined with geopolitical stress, contributed to a 2.1% drop in Japan's Nikkei index and a 2.4% fall in South Korean stocks. MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.7%. In Europe, EUROSTOXX 50 futures declined 0.5%, and DAX futures eased 0.4%. On Wall Street, S&P 500 futures dipped 0.3%, and Nasdaq futures shed 0.5%.
Inflation and interest rates are expected to be central topics at the G20 finance ministers and central bankers meeting in North Carolina. U.S. Treasury Secretary Scott Bessent indicated plans to meet with the head of the Bank of Japan amid speculation that Japan may also raise interest rates in September to support the yen, which recently fell below 160.00 per dollar. Bessent described the yen's slide as "pretty well contained," suggesting it was not disorderly enough to warrant joint intervention.
The dollar held steady at 160.00 yen. Two-year Treasury yields remained at 4.36%, following a significant jump on Friday. Thirty-year bond yields were more stable at 5.2080%. The euro saw a slight increase to $1.1591, after a 0.6% decline on Friday following Warsh's speech. Data on EU inflation this week is expected to reinforce market expectations for another rate hike from the European Central Bank at its September 10 meeting.
In commodity markets, U.S. crude oil rose 1.3% to $84.50 a barrel. Gold prices were marginally higher at $4,454 an ounce, after experiencing a 3.2% decline on Friday due to rising yields.