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

On Tuesday, most Asian stock markets faced another challenging day as oil prices continued to rise and investors anticipated a potential Federal Reserve interest rate hike soon. Although tech firms experienced a minor recovery from their recent decline driven by concerns over the rapid advancement of AI, the overall market sentiment remained cautious.

The crisis in the Middle East, particularly the Houthis' control of a crucial shipping route, and the resulting surge in crude prices pushed global inflation concerns to new heights. The main contracts for the two largest indexes in Asia surged more than 1% on Tuesday, reflecting the market's sensitivity to the energy situation.

The group fighting against the Saudi-backed government seized control of the Red Sea coast and the Bab al-Mandab Strait, which has become vital due to the ongoing US-Iran conflict.

However, Riyadh shut down its East-West pipeline after Houthi drone attacks, causing a slight dip in oil prices on Monday when US President Donald Trump suggested a potential deal with Iran through his social media platform. The surge in energy costs, with US diesel costs reaching $6 a gallon, has put pressure on central banks to curb inflation.

The 10-year US Treasury yield had reached just below 5%, marking its first time above that level since October 2023. Central bank policymakers, especially the Federal Reserve, are now under intense scrutiny, with a more than 90% chance of a rate hike this week among traders. While Wall Street's major indexes experienced a sell-off, Asian markets largely retreated, with Hong Kong, Shanghai, Sydney, Singapore, Wellington, and Taipei all dropping in value.

Tokyo, Seoul, and Manila were the only exceptions, with a slight rebound in tech firms, including South Korean and Japanese companies, after Monday's losses triggered by Anthropic CEO Dario Amodei's call for a coordinated slowdown in AI development. The comments received support from industry leaders such as Elon Musk and OpenAI's Sam Altman, leading to a partial recovery in Samsung, SK hynix, Kioxia, and SoftBank stocks in Seoul and Tokyo.

The latest AI developments come after a strong August rally fueled by worries about returns on substantial investments in the sector and extended valuations. Analysts believe the AI boom forced traders to reevaluate their outlook for the industry's growth speed, emphasizing that the market remains highly sensitive to the pace of technological progress.