Most markets drop as oil extends gains ahead of expected US rate hike

Most Asian stock markets faltered again on Tuesday as oil prices continued to rise and traders anticipated a Federal Reserve interest rate hike this week. However, tech firms exhibited a slight recovery following a sell-off driven by concerns over the AI boom. The crisis in the Middle East, particularly the control of a key shipping route by the Houthi rebels, has pushed crude prices to over $100 a barrel, heightening global inflation concerns.

Both main contracts in the market surged more than one percent on Tuesday. The Houthis, battling the Saudi-backed government, recently seized control of Yemen's Red Sea coast and the Bab al-Mandab Strait, which has become crucial due to the US-Iran war choking the Strait of Hormuz. Riyadh closed its East-West pipeline last weekend after Houthi drone attacks.

The sharp rise in crude prices, with US diesel hitting $6 a gallon on Friday, has put pressure on central banks to curb inflation. The 10-year US Treasury yield was just below five percent, having reached that level for the first time since October 2023. The European Central Bank recently raised rates, leading focus to the Federal Reserve.

Traders are pricing a more than 90 percent chance of a rate hike. After a decline on Wall Street's three main indexes, Asia mostly retreated, with Hong Kong, Shanghai, Sydney, Singapore, Wellington and Taipei all falling. Tokyo, Seoul and Manila experienced a slight rebound. A small bounce in tech firms provided support for South Korean and Japanese firms following Monday's losses, which came after Anthropic CEO Dario Amodei called for a coordinated slowdown in AI development to better understand the risks.

The comments received support from other industry leaders, including Elon Musk and OpenAI's Sam Altman. Tech stocks, particularly chipmakers, suffered significant losses, with the Philadelphia Semiconductor Index dropping 5.9 percent, its biggest decline in over two months. Some investors believe the Fed's potential rate hike could be an attempt to curb competition from smaller firms.

Despite this, the market remained unfazed by the tech sector's setbacks, focusing instead on the potential inflation impact and the Fed's decision.