Stocks sink as oil rally fans inflation and rate hike fears

Asian stocks declined on September 10 as oil prices continued to rise following the return of Middle East hostilities, thus sparking inflation concerns. The United States and Iran have been exchanging strikes around the critical Strait of Hormuz, with Saudi Arabia engaged in a conflict with Yemeni rebels. This has hindered efforts to resolve the crisis, negatively impacting markets.

Brent crude surpassed US$100 for the first time since July and surged over 20 percent in a week, driven by the escalation of attacks on vessels in Hormuz. This has led to speculation that central banks, including the US Federal Reserve, may need to raise interest rates to curb prices, with US diesel already at a record of nearly US$6 per gallon.

The European Central Bank is expected to increase borrowing costs on September 10. In the latest attacks, Iran admitted striking over a dozen ships trying to pass through the strait on September 9 and announced an expansion of a no-go zone outside the waterway. Iran has blocked the strait since the war began at the end of February while the United States continues to enforce a counter-blockade of Iranian ports.

Iran also claimed to have hit a US military base in Jordan in retaliation for US forces destroying five Iranian oil tankers the day before. Meanwhile, Saudi Arabia is locked in a conflict with Houthi rebels who are targeting oil facilities in the kingdom as part of an offensive towards the Bab al-Mandab chokepoint. The waterway is becoming increasingly crucial for Saudi oil with the Strait of Hormuz closed.

Brent oil peaked at US$101.94 on September 10, while West Texas Intermediate reached US$97.79, the highest level since May. The rally has raised expectations of higher inflation, coinciding with Washington's preparation to release critical consumer price data that could influence the Fed's decision on whether to raise rates next week.

Consequently, all three main US indexes were down on Wednesday, and Europe also experienced a loss. Seoul, Hong Kong, and Sydney also fell more than 1 percent, while Tokyo, Shanghai, Singapore, Wellington, Taipei, and Manila registered significant declines as well. "September is typically challenging, historically the weakest month for Wall Street," Neil Wilson of Saxo Markets noted.

"After a decent but mixed summer fueled by record earnings momentum, particularly in the US stock market, the next phase for investors will revolve more around macro factors: central banks and inflation specifically, which is likely to lead to a rougher period." Inflation concerns have also driven up government bond yields, which surged further on September 9 after the US Treasury announced an expanded buyback program that appeared to disappoint investors anticipating more.

In company news, shares in Japanese gaming giant Nintendo dropped 5.5 percent following a disappointing online showcase of upcoming games. Analyst Serkan Toto of Kantan Games described the event as "very underwhelming," stating that Nintendo has shown "everything they have" for the year, with a lack of big original titles. "They don't have much, and I think the investors understand that," Toto told AFP.