Shares skid in Asia as oil, yields stay high

Asian share markets declined on Monday following renewed conflict between the U.S. and Iran, which drove up oil prices, while bond yields remained elevated after investors reduced expectations of a U.S. rate hike. Brent futures rose 1.4% to $89.38 a barrel after U.S. forces attacked two of Iran's launchers on its Larak island on Sunday.

Iran retaliated by targeting U.S. forces stationed in Jordan, as reported by Fox News. The heightened risk to inflation kept bond markets on edge after Federal Reserve Chair Kevin Warsh highlighted the central bank's need to combat inflation in a Friday speech. Markets responded by increasing the likelihood of a September rate hike to 57%, pushing short-term Treasury yields sharply higher and flattening the yield curve.

Chief U.S. economist at JPMorgan, Michael Feroli, noted that a rate hike isn't expected until December but acknowledged the September meeting is still on the table. Warsh's remarks indicated a chair more inclined to address inflation with tighter policy. The potential for an early hike hinges on the August payrolls report and September consumer price data.

Analysts project a 58,000 job increase, following July's 23,000 surprise drop, with unemployment likely staying at 4.1%. Such a strong outcome could mitigate the risk of a September rate move. Inflation concerns are expected to prompt New Zealand's central bank to raise rates for a second consecutive meeting on Wednesday, while the Bank of Canada is anticipated to hold, considering the potential economic damage from a U.S.-China trade war.

Elevated yields and geopolitical tension contributed to a 2.1% decline in Japan's Nikkei, while South Korean stocks slipped 2.4%. MSCI's Asia-Pacific index outside Japan fell 0.7%. In Europe, EUROSTOXX 50 futures dropped 0.5%, and DAX futures eased 0.4%. On Wall Street, S&P 500 futures fell 0.3%, and Nasdaq futures slipped 0.5%.

U.S. Treasury Secretary Scott Bessent revealed plans to meet the Bank of Japan's head, as speculation mounts that the central bank may also raise interest rates in September. Bessent noted that the yen's drop to above 160.00 per dollar was well-contained, ruling out the need for fresh Japan-U.S. intervention. The dollar held steady at 160.00 yen, still below the July high of 163.99.

Two-year Treasury yields remained at 4.36%, after surging nearly 12 basis points on Friday, with 30-year bonds showing less movement at 5.2080%. Warsh's emphasis on fighting inflation provided some comfort to investors. The euro strengthened slightly to $1.1591, after falling 0.6% on Friday due to Warsh's speech. Upcoming EU inflation data is anticipated to support the case for another ECB rate hike during its September 10 meeting.

In commodities, U.S. crude climbed 1.3% to $84.50 a barrel, while gold edged up fractionally to $4,454 an ounce, after losing 3.2% on Friday amid soaring yields.