Asian equities experienced a sharp decline on Wednesday as MSCI's Asia-Pacific equities gauge dropped 1% in early trading, with South Korea's KOSPI falling 2.87% at the open and Japan's Nikkei 225 declining 1.60%. The GIFT Nifty traded lower, signalling a weak opening for the Nifty 50 on Dalal Street. The regional weakness follows fresh conflict in West Asia that sent oil prices climbing and stoked fresh worries over inflation and the odds of another rate increase by the Federal Reserve. The threat of further disruptions to the Strait of Hormuz has brought about renewed anxiety over inflation, driving a selloff in stocks across most major markets and a rout in global bond markets, according to Westpac analysts. The renewed surge in energy prices is adding to inflation concerns already fueled by government spending and heavy corporate borrowing to finance the artificial-intelligence buildout, as noted by Lombard Odier Singapore Ltd senior macro strategist Homin Lee.
Crude oil prices continued to climb, with Brent crude approaching $95 a barrel and US West Texas Intermediate (WTI) advancing 0.8% to $90.91. The rise came as intensifying hostilities between the US and Iran heightened concerns over potential disruptions to oil shipments through the Strait of Hormuz. US President Donald Trump said the American strikes were carried out in response to Iran's efforts to mine the Strait of Hormuz and an earlier attack on a US military base in Jordan. Iran, meanwhile, said it had launched a missile at a US air base in Jordan following the American strikes. As per SPI Asset Management's Stephen Innes, "The Middle East had finally gone quiet enough for oil traders to start sanding some of the war premium out of crude. Then Sunday arrived, with a reminder that quiet in the Strait of Hormuz is not the same as peace."
The surge in global energy prices pushed global bond yields worldwide to their highest levels since 2008, as traders increased their expectations of further interest-rate hikes by the US Federal Reserve. The yield on the US 10-year Treasury climbed to its highest level since early 2025 on Tuesday, marking the latest indication of a global bond-market selloff. Federal Reserve Chair Kevin Warsh's speech at Jackson Hole last week further strengthened expectations of tighter monetary policy. According to a Bloomberg report, markets are now pricing in around a 70% probability of a rate hike in September. Fed funds futures are pricing an implied 67% probability of a 25-basis-point increase to benchmark borrowing costs at the U.S. central bank's two-day meeting ending on September 16, compared to a 39.6% chance a week ago.
European shares hovered near a one-month low on Wednesday as rising government bond yields and escalating US-Iran tensions fuelled concerns over higher energy prices and inflation. The pan-European STOXX 600 was broadly unchanged at 647.87 points by 0714 GMT, while Germany's DAX slipped 0.2%. Germany's 10-year bond yield hit its highest level since April 2011, raising expectations of tighter ECB policy. Markets are also pricing in a greater likelihood of tighter European monetary policy, with LSEG-compiled data showing investors assigning nearly a 40% probability that the European Central Bank's deposit rate could reach 3% by March 2027, compared with 25% a week earlier. The rise in oil prices has intensified inflation concerns at a time when governments are already facing elevated borrowing costs and heavy debt burdens, according to Reuters.
Overnight on Wall Street, the S&P 500 slipped 0.7% and the Nasdaq Composite fell 1% as a surge in government bond yields weighed on equities. US stock futures were little changed on Tuesday night after rising bond yields and oil prices pushed Wall Street lower for another session, with Dow Jones Industrial Average futures edging up 12 points. Gold was flat at $4,328.59 an ounce, while bitcoin slipped 0.2% to $77,246.57 and ether was 0.3% lower at $2,412.60. The declines came as data from the Institute for Supply Management released on Tuesday showed US manufacturing activity moderated in August amid a slowdown in new orders, but remained in expansionary territory. Traders believe that the Federal Reserve is likely to lift interest rates at its next meeting in two weeks, though a hike is not certain. Attention will now turn to a string of crucial data releases over the next two weeks before the Fed makes its decision, with jobs data this week and the consumer price index (CPI) next week.
