Shares slip in Asia as oil climbs, rate hikes loom

Asian stock markets experienced a decline on Monday due to rising oil prices and speculation of upcoming interest rate hikes, as investors grew concerned over potential disruptions to global energy supplies. Brent crude oil prices surged by 3% following new attacks on a Saudi oil pipeline and a Yemeni Houthi advance, threatening to exacerbate the ongoing energy crisis.

The situation was further complicated by the postponement of a meeting in Oman between Iran and Gulf Arab states, which was intended to discuss a deal to open the Strait of Hormuz. This key shipping route and the Bab el-Mandeb strait have been under threat, raising fears that oil prices may remain elevated for an extended period, fueling inflation worldwide.

The U.S. Federal Reserve was said to be pricing in an 86% chance of raising interest rates by 25 basis points on Wednesday, with a potential further hike by December. This would mark the first increase since mid-2023 and would be the first of at least two rate hikes this year, according to Michael Feroli, chief U.S. economist at JPMorgan. He cautioned that the Fed's actions need to be backed by tangible measures to preserve its credibility.

Brent futures climbed 3.1% to $107.84 per barrel, while U.S. crude increased by 2.8% to $102.85 per barrel. Nikkei futures fell 2% to 63,260, while S&P 500 and Nasdaq futures declined by 0.5% and 1.0%, respectively. Treasury yields saw slight gains, with 2-year and 10-year yields rising by 26 and 19 basis points, respectively, as the yield curve flattened.

Analysts, including Ben Snider, chief U.S. equity strategist at Goldman Sachs, suggested that strong corporate earnings could help offset the impact of rising borrowing costs. Despite historical precedents, where equities often struggle during rate hikes, Snider anticipates a continuation of the bull market. The S&P 500 has historically generated an average three-month return of -2% at the start of seven hiking cycles, but +9% in the 12 months following the first hike.

The Bank of Japan was expected to raise its cash rate by 0.25% to 1.25% during its meeting on Friday, with a 76% chance of further tightening measures to counteract a weakening yen following market intervention. Meanwhile, the dollar held steady at 153.77 yen and the euro remained virtually unchanged at $1.1600, while the British pound held steady at $1.3518.