Shares skid in Asia as oil, yields stay high

Bond markets remained cautious about inflation risk following Federal Reserve Chair Kevin Warsh's acknowledgment that more work was needed to curb inflation. (EPA Images) In Asia, share markets declined on Monday as tensions escalated between the United States and Iran, driving up oil prices, while bond yields remained high after investors reduced the likelihood of a US rate hike.

Brent futures increased by 1.4% to US$89.38 a barrel following US forces' attack on two of Iran's launchers on their island of Larak on Sunday. Iran retaliated by targeting US forces based in Jordan, Fox News reported. The ongoing risk to inflation kept bond markets on alert after Warsh highlighted on Friday that the central bank still had work to do to control inflation.

Markets responded by raising the chance of a September rate increase to 57%, pushing short-term Treasury yields significantly higher and flattening the yield curve. JPMorgan's chief US economist, Michael Feroli, stated that although the exact timing of a hike is uncertain, Warsh's speech indicated a more hawkish chair willing to implement policy tightening.

The likelihood of an early rate increase hinges on the outcome of the August payrolls report and consumer price data on September 11. Analysts predict a job growth jump of 58,000, following July's unexpected drop of 23,000, with unemployment remaining at 4.1%. This could significantly reduce the risk of a September rate move. The inflation concern may prompt New Zealand's central bank to raise rates for a second consecutive meeting on Wednesday, while the Bank of Canada is expected to stay on hold due to potential trade war repercussions.

Higher yields, coupled with geopolitical tensions, caused Japan's Nikkei to fall 2.1% and South Korean stocks to drop 2.4%. MSCI's comprehensive Asia-Pacific index outside Japan declined by 0.7%. In Europe, EUROSTOXX 50 futures dropped by 0.5%, and DAX futures decreased by 0.4%. On Wall Street, S&P 500 futures fell by 0.3%, and Nasdaq futures slipped by 0.5%.

The dollar surpassed 160 yen, remaining slightly below its July peak of 163.99. Two-year Treasury yields remained at 4.36%, up almost 12 basis points from Friday, while 30-year bond yields were less affected at 5.2080%, with investors finding some comfort in Warsh's focus on inflation. The euro strengthened marginally to US$1.1591 from a 0.6% decline on Friday after Warsh's speech.

Upcoming EU inflation data is anticipated to solidify market expectations for another European Central Bank hike during its meeting on September 10. In commodity markets, US crude oil increased by 1.3% to US$84.50 a barrel. Gold showed a slight gain at US$4,454 an ounce, after losing 3.2% on Friday as yields surged.