Stocks tumble as oil spikes, bond yields hit multi-decade highs on Mideast flare-up

Hong Kong, September 2 - Stocks declined and bond yields soared to multi-decade highs as traders intensified bets on further interest rate hikes, driven by escalating tensions in the Middle East and surging oil prices. Crude oil prices jumped over two percent and have risen by approximately ten percent this week following the United States attacking an Iranian island in the Strait of Hormuz, triggering a series of retaliatory strikes. Tehran has subsequently targeted American interests in multiple regional nations.

This latest round of military action follows weeks of relative peace, during which negotiations failed to yield results. Washington has vowed to impose "economic asphyxiation" on Iran. With the strategic strait—responsible for carrying about a fifth of global oil and gas—effectively shut for the foreseeable future, energy costs appear unlikely to decrease.

This has heightened concerns about inflation, compounded by worries over government spending and a wave of corporate debt sales. Consequently, expectations for interest rate hikes have intensified, pushing up borrowing costs.

The yield on UK 30-year government bonds is at its highest since 1998, while 10-year debt yields are at levels seen during the 2007-08 global financial crisis. Japan's 10-year bond yield is at a 30-year high, near the 2007 mark for 30-year US Treasuries, and US 10-year yields are also at crisis levels. Rajeev De Mello, from Gama Asset Management, noted that bond yields had already been climbing, and the renewed US-Iran attacks and their impact on oil prices have heightened investor concerns about bonds.

Higher yields now pose a significant headwind for Asian equities, particularly longer-duration tech stocks, affecting markets across Asia, including Tokyo, Seoul, Hong Kong, Shanghai, Sydney, Singapore, Wellington, Taipei, and Manila. These areas experienced substantial declines following losses on Wall Street.

Investors are preparing for the release of crucial data on jobs and inflation over the coming week, which could determine whether the Federal Reserve raises rates at its meeting in two weeks. Traders now believe there is a 70 percent chance of a hike, according to Bloomberg. Federal Reserve Governor Michael Barr reinforced this possibility by stating that policy makers should be prepared to raise rates if inflation remains stubbornly above the bank's 2 percent target, which has persisted for over five years.

"If trends in the data give me some confidence that inflation is moderating on a path to two percent, then I think we can take a bit more time to assess our policy stance," he said in prepared remarks. "However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates."