Asian shares slump as surging oil prices inflame inflation risks

Global bond yields jumped to record highs and Asian share markets plummeted on Friday due to surging oil prices, raising concerns of more aggressive policy tightening from central banks worldwide. Brent crude oil reached a four-month peak of US$109.97 a barrel, following a 6% surge the previous night, marking a weekly gain of nearly 13%.

The conflict between the US and Iran, along with the Houthi takeover of Yemen's Mocha port, disrupted oil flows through the Strait of Hormuz and the Bab el-Mandeb, potentially pushing Brent to US$121.99 a barrel by year-end. This development prompted investors to consider the risk of a prolonged conflict. President Donald Trump's comments about the war extending beyond the November midterms also contributed to market anxiety.

The 10-year US Treasury yield surged to 4.9708%, just shy of the 5% level, raising borrowing costs for the US$40 trillion government debt. Meanwhile, Japanese 10-year government bond yields rose 6 basis points to 2.97%, as Japan's wholesale inflation remained high, supporting expectations of an imminent rate hike from the Bank of Japan.

Analysts forecast that eight out of nine developed-market central banks, including the Federal Reserve, European Central Bank, and others, will raise interest rates by the end of the year to combat inflation and address commodity price pressures. The European Central Bank recently raised rates for the second time this year, with more tightening expected, including in October.

The spike in oil prices has put pressure on US consumer price data expected later in the day, which could determine whether the Fed raises rates next week. Higher bond yields increased discount rates for corporate valuations, causing Asian stocks to face significant losses. MSCI's Asia-Pacific index outside Japan dropped 1.8%, while Japan's Nikkei fell 2.8%.

Chinese blue-chip stocks declined 1.2%, and Hong Kong's Hang Seng index slipped 1.5%. The US dollar strengthened as Treasury yields rose, gaining 0.4% against major currencies.