Shares ease in Asia as oil climbs, yields stay high

Asian share markets declined on Monday as tensions between the U.S. and Iran escalated, driving up oil prices, while bond yields remained at stubbornly high levels following investors decreasing the likelihood of a U.S. interest rate hike. Oil futures surged 2.7% to $90.51 a barrel after U.S. forces attacked two Iranian launchers on Iran's Larak island on Sunday.

Iran retaliated by targeting U.S. forces in Jordan and claiming to have hit a tanker in the Strait of Hormuz. President Trump reportedly announced that Iran had blown up Kharg Island, Iran's largest oil terminal, though no confirmation was provided by the military. The geopolitical instability raised concerns about inflation, keeping bond markets on edge as Federal Reserve Chair Kevin Warsh stressed that the central bank needed to address the issue.

In response, the probability of a September rate increase rose to 57%, pushing short-term Treasury yields higher and flattening the yield curve. Warsh's comments suggested a chair more willing to tighten policy to combat inflation. Barclays now anticipates two rate hikes in September and December, while the Fed is expected to raise rates by 25 basis points in both months.

Key factors in determining the timing of the hikes include the outcome of the August payrolls report and consumer price data due on September 11. The prospect of higher yields and geopolitical tensions caused MSCI's Asia-Pacific index outside Japan to drop 0.6%, while Chinese blue chips fell 0.4%. Europe's EUROSTOXX 50 and DAX indices also experienced slight declines.

Meanwhile, the U.S. dollar edged closer to 160 yen, and Japanese bonds suffered as 10-year yields breached their highest level since 1996.