Share markets slid in Asia on Monday as supply concerns caused oil prices to spike anew, while investors braced for possible interest rate hikes in both the United States and Japan this week.
Brent climbed 3% as new strikes on Saudi Arabia and on ships in the Gulf tested nerves, after an attack on a Saudi oil pipeline and an advance by Yemen’s Houthis threatened to worsen the wartime disruption to global energy supplies.
A meeting in Oman between Iran and Gulf Arab states, scheduled for Monday to discuss a deal on opening the Strait of Hormuz, was postponed.
With shipping through the strait and the Bab el-Mandeb under threat, analysts fear oil prices could stay elevated for a lengthy period, stoking inflation globally.
An uncomfortably hot U.S. consumer price report on Friday led markets to price in an 86% chance the Federal Reserve will lift rates by 25 basis points on Wednesday, and move again by December. It would be the first hike since mid-2023.
“We now expect the Fed to hike twice this year, in September and December,” said Michael Feroli, chief U.S. economist at JPMorgan. “At this stage, failing to back up words with action could put the credibility of the institution at risk.”
“Whether these actions represent a limited recalibration or mark the start of a more sustained hiking cycle will depend on incoming data,” he added. “We anticipate the former scenario but see risks for the latter.”
Brent futures were last up 2.6% at $107.36 a barrel, having gained almost 9% last week, while U.S. crude rose 2.4% to $102.48 a barrel.
Japan’s Nikkei .N225 fell 1.7%, while South Korea .KS11 dropped 3.3%. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.8%.
In Europe, futures lost 0.5%, while DAX futures fell 0.4% and futures dipped 0.1%. On Wall Street, S&P 500 futures lost 0.5%, while Nasdaq futures fell 1.1%.
HIGH YIELDS TEST EQUITY VALUATIONS
Yields on 10-year Treasury notes were a fraction lower at 4.967%, having been sold heavily in recent weeks. Just last week alone, 2-year yields rose a steep 26 basis points, while 10-year yields added 19 basis points as the curve flattened.
Ben Snider, chief U.S. equity strategist at Goldman Sachs, said strong corporate earnings should provide support for Wall Street if borrowing costs rise.
“Equities typically struggle when the Fed starts to hike rates, but we expect the bull market to continue,” he added. “The S&P 500 has generated an average three-month return of -2% at the start of seven hiking cycles during the last few decades.”
“Yet the S&P 500 has generated an average return of +9% during the 12 months following the first hike.”
Markets also imply around a 76% chance the Bank of Japan will lift its cash rate by a quarter point, to 1.25%, when it meets on Friday. The BOJ is also expected to sound hawkish on further tightening as it struggles to prevent a relapse in the yen after market intervention helped to pull it from a 40-year low.
The dollar was holding at 153.49 yen , having fallen around 4% over the last two weeks and away from a July peak of 163.99. The euro was also little changed at $1.1592 , having found support at $1.1570 on Friday.
Sterling was flat at $1.3522 with the Bank of England expected to hold its rates at 3.75% on Thursday, though the decision could again be split.
In commodity markets, gold slipped 0.3% to $4,336 an ounce, as higher bond yields diminished the lure of the non-interest-paying metal.
