Shares skid in Asia as oil climbs, yields stay high

In Asia, share markets experienced a decline on Monday due to fresh fighting between the U.S. and Iran, which led to an increase in oil prices. Brent futures surged 2.8% to $90.60 a barrel after U.S. forces targeted two of Iran's launchers on their island of Larak on Sunday. Iran retaliated by attacking U.S. forces in Jordan, while President Donald Trump claimed Kharg Island, Iran's main oil terminal, had been destroyed. However, this assertion had not been confirmed by military sources.

The heightened risk to inflation prompted bond markets to remain cautious following Federal Reserve Chair Kevin Warsh's emphasis on the central bank's ongoing efforts to control inflation. In response, the probability of a September rate increase rose to 57%, causing short-term Treasury yields to sharply rise and flattening the yield curve.

Michael Feroli, JPMorgan's chief U.S. economist, stated that while a hike is not expected until December, the September meeting is considered live. Warsh's speech indicated a more willing central bank to translate its inflation concerns into policy tightening.

Key factors influencing the likelihood of an early rate hike include the August payrolls report and consumer price data scheduled for September 11. Analysts predict a job increase of 58,000, following a July drop of 23,000, with unemployment holding steady at 4.1%. A much weaker job report might significantly reduce the risk of a September rate move.

Higher yields, coupled with geopolitical tension, pushed Japan's Nikkei down 1.6%, while South Korean stocks fell 2.2%. MSCI's Asia-Pacific index excluding Japan lost 1.2%.

In Europe, EUROSTOXX 50 futures declined 0.5%, and DAX futures fell 0.4%. On Wall Street, S&P 500 futures dropped 0.4%, and Nasdaq futures decreased 0.5%.

The U.S. dollar moved above 160 yen, reflecting the ongoing inflationary pressures and interest rate considerations. Treasury Secretary Scott Bessent expressed plans to meet the head of the Bank of Japan, speculating that further interest rate hikes may be necessary to support the weakening yen.