Asian stocks fall as oil stokes inflation fears

Asian stocks experienced a decline as oil prices rose, fueling inflation concerns and increasing Treasury yields. The MSCI Asia Pacific Index declined 0.4%, mirroring losses on Wall Street. Japan, South Korea, and Australia also witnessed a drop in benchmark indices. The S&P 500 futures remained relatively unchanged, while the Hang Seng futures dropped 0.9%, and the Nikkei 225 futures fell 1.3%.

Japan's Topix and Australia's S&P/ASX 200 saw reductions of 0.4% and 1.7%, respectively. In the US, the S&P 500 Index fell 0.5%, primarily due to industrial and consumer discretionary shares' underperformance. The Nasdaq 100 Index dropped 0.3%, impacted by Nvidia, Amazon, and Alphabet's losses.

Oil prices surged above US$101 a barrel, with Brent crude peaking at US$101.94, driven by Middle East tensions and rising fears of energy supply disruptions. The 10-year Treasury yield reached 4.85% in the US session, a level last seen in late 2023. Investors were disappointed by the US government's plan to purchase up to US$6 billion of longer-maturity debt, which had been anticipated to result in a larger increase.

Markets are closely monitoring Friday's US inflation report, as it could influence the Federal Reserve's decision on whether to raise interest rates during their upcoming meeting. A more favorable reading might strengthen the case for additional rate hikes, while softer data could encourage a pause in rate hikes. Evelyne Gomez-Liechti, a multi-asset strategist at Mizuho International, noted that persistent high oil prices make it increasingly challenging for markets to discount inflation.

Oil prices remained elevated after Iran declared readiness for a more intense war following flare-ups across the Middle East. US President Donald Trump expressed that the war would only end post the November midterm elections, warning that significant fuel price relief would not materialize before then. This stance heightened concerns about prolonged energy supply constraints.

The Japanese yen slipped 0.1% to 153.65 per US dollar, following US Treasury Secretary Scott Bessent's remarks and traders' anticipation of Bank of Japan board member Kazuyuki Masu's speech on Thursday. The US dollar was little changed in Bloomberg's gauge. The US Bureau of Labor Statistics will release August producer price data on Thursday, followed by the consumer price index numbers on Friday.

The likelihood of a September Fed rate hike, as implied by swaps, was at 62%, up from 60% on Tuesday. A hotter CPI reading would likely confirm a September hike and bolster the US dollar, while a cooler reading could strengthen the argument for maintaining rates and weaken the dollar.