Shares skid in Asia as oil, yields stay high

Asia's share markets declined on Monday as tensions escalated between the United States and Iran, prompting oil prices to rise. Meanwhile, bond yields remained elevated due to reduced expectations of a US rate hike, as investors narrowed the chances of an increase. Brent futures surged by 1.4% to US$89.38 a barrel after the US forces targeted two of Iran's launchers on Larak Island on Sunday.

Iran retaliated by attacking US forces in Jordan, according to Fox News. Federal Reserve Chair Kevin Warsh highlighted on Friday that the central bank needed to take further steps to curb inflation, leading markets to increase the odds of a September rate hike to 57%. Short-term Treasury yields rose sharply, and the yield curve flattened.

JPMorgan's chief US economist, Michael Feroli, stated that a rate hike was not anticipated until December but acknowledged that the September meeting remained possible. Warsh's comments signaled a willingness to tighten policy due to inflation concerns. The likelihood of an early hike depended on the results of the August jobs report and consumer price data scheduled for September 11.

Analysts predict a job growth of 58,000, following July's unexpected drop of 23,000, with unemployment staying at 4.1%. A weaker-than-expected labor market report could significantly reduce the probability of a September rate hike. Inflation fears 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 expected to remain on hold due to potential economic damage from a US trade war.

Higher yields, coupled with geopolitical tensions, pushed Japan's Nikkei down 2.1%, and South Korean stocks fell 2.4%. MSCI's Asia-Pacific index outside Japan decreased by 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%. The dollar surged above 160 yen, remaining below its July peak of 163.99.

Two-year Treasury yields remained at 4.36%, having increased almost 12 basis points on Friday. Thirty-year bond yields were more stable at 5.2080%, benefiting from Warsh's emphasis on inflation control. The euro strengthened slightly to US$1.1591, after falling 0.6% on Friday following Warsh's speech. Upcoming EU inflation data is anticipated to reinforce market expectations of another European Central Bank rate hike on September 10.

In commodities, US crude oil gained 1.3% to US$84.50 a barrel. Gold marginally increased to US$4,454 an ounce, having dropped 3.2% on Friday as yields surged.