Shares skid in Asia as oil, yields stay high

Shares suffered a decline in Asian markets on Monday due to heightened tensions between the United States and Iran, which led to an increase in oil prices, while bond yields remained elevated as investors reduced the chances of a US rate hike. Brent futures increased by 1.4% to $89.38 per barrel following US forces' strike on two of Iran’s launchers on their island of Larak on Sunday.

In retaliation, Iran targeted US forces stationed in Jordan, according to Fox News. This situation kept bond markets on edge after Federal Reserve Chair Kevin Warsh highlighted the central bank's ongoing efforts to curb inflation. Markets responded by increasing the probability of a September rate increase to 57%, causing short-term Treasury yields to rise sharply and flattening the yield curve.

JPMorgan's chief US economist, Michael Feroli, stated that they anticipate a hike not until December, but acknowledge the September meeting is still possible. A crucial factor for an early hike is the outcome of the August payrolls report and consumer price data due on September 11. Analysts forecast a job growth of 58,000, following July's unexpected fall of 23,000, with unemployment remaining at 4.1%.

The inflation concern is 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 the potential economic damage from a trade war with the US. Higher yields, coupled with geopolitical stress, led to Japan's Nikkei dropping 2.1%, and South Korean stocks falling 2.4%.

MSCI's comprehensive index of Asia-Pacific shares outside Japan declined 0.7%. In Europe, EUROSTOXX 50 futures decreased 0.5%, and DAX futures fell 0.4%. On Wall Street, S&P 500 futures slipped 0.3%, and Nasdaq futures dropped 0.5%. The dollar briefly surpassed 160 yen, though it remains below its July high of 163.99. Two-year Treasury yields remained at 4.36%, up from a 12 basis point increase on Friday, as investors found some relief in Federal Reserve Chair Warsh's emphasis on fighting inflation.

The euro strengthened marginally to $1.1591, after slipping 0.6% on Friday following Warsh's speech. Upcoming EU inflation data is anticipated to reinforce the market's expectation for another ECB rate hike during its meeting on September 10. In commodity markets, US crude oil rose 1.3% to $84.50 a barrel, while gold showed a slight increase to $4,454 an ounce, after losing 3.2% on Friday amid rising yields.