Bond selloff deepens and stocks drop as oil prices stoke inflation fears

Global bond yields surged to record highs on Tuesday as Middle East conflict escalated oil prices, prompting traders to anticipate interest rate hikes, which weighed on stock markets worldwide. Japan's 10-year benchmark yield reached 3% for the first time since 1996, elevating borrowing costs for the government. Britain's 10-year yield reached a 15-year peak at 5.24%, while Germany's yielded a 15-year high at 3.36%.

Strategist Ryutaro Kimura commented on the growing resignation towards rising interest rates in Japan, which have historically provided stability to global markets. Higher oil prices and renewed US-Iran skirmishes fueled inflation concerns, negatively impacting bonds. Fed Chair Kevin Warsh suggested in a recent speech that traders anticipate US rate hikes in 2025, potentially marking the start of a three-rate hike cycle.

US stock futures plummeted alongside rising bond yields and oil prices, with S&P 500 ESc1 futures declining by 0.6%. Europe's STOXX 600 index fell by 0.7%, and Hong Kong's Hang Seng Index dropped by 1%, driven by poor performance of tech company Shein Global. Shares plummeted 8%, reducing Shein's market value to less than a quarter of its 2022 peak.

Higher yields could strain tech companies heavily borrowing in bond markets for AI investments, according to strategist Aneeka Gupta. As yields rise, the pressure on this growth driver of equity markets intensifies. Higher oil prices contributed to the surge in global bond yields, with the conflict in the Middle East casting doubt on the reopening of the Strait of Hormuz.

Brent crude rose 2% to US$92.20, while Europe's benchmark natural gas price approached its highest level since early 2023. US President Donald Trump threatened further strikes against Iran following an exchange of fire in the region. Meanwhile, heightened Russia-Ukraine conflict sent wheat prices nearing three-year highs. The US dollar strengthened due to its safe-haven status as bonds and stocks declined, with the euro slipping 0.2% to US$1.16 and the dollar rising 0.1% against the yen to 159.9.

Traders now anticipate a 65% chance of a Fed rate hike in September, up from 40% a week ago, and a further rate hike from the European Central Bank in the same month.