Stocks slip in Asia as oil and yields climb

Asian stock markets slipped on Monday, as oil prices surged and bond yields climbed, amid ongoing tensions between the United States and Iran. US President Donald Trump had recently rejected an Iranian proposal to reopen the Strait of Hormuz, raising doubts about a swift resolution to the conflict. Brent crude futures rose 2.7% to $107.16 per barrel, marking gains of almost 18% for the month, while US crude futures climbed 1.9% to $94.16 per barrel.

The limited refining capacity and soaring diesel prices have increased the likelihood of inflation becoming embedded in pricing and wage decisions.

Central banks responded to the rising energy costs with rate hikes, with the Reserve Bank of Australia expected to tighten further when it meets on Tuesday. Markets now suggest a 68% probability of a second consecutive Federal Reserve hike in October, with roughly 90 basis points of tightening priced in until late next year. Strong US economic data has bolstered expectations for corporate earnings, despite surging bond yields, which is supporting equity prices.

The Atlanta Fed's GDPNow estimate predicts a rapid 5.0% growth rate for the current quarter, while activity has remained robust in Asia and Europe due to increased AI investments. Bruce Kasman, chief economist at JPMorgan, noted that the global expansion appears to have entered a phase of broad-based strength rarely observed in the past two decades. Although bond yields have risen, equity prices have remained close to record levels.

The situation has been particularly challenging for China, with the Nikkei flat and the South Korean market declining 2.0%. MSCI's Asia-Pacific index outside Japan fell 0.6%, and Chinese blue chips reached a one-year low, as US lawmakers proposed legislation to prevent federal agencies from using Chinese-made components in AI data centers. Chinese industrial profit growth slowed in August, as domestic demand continued to lag.

On Wall Street, S&P 500 futures declined 0.3%, Nasdaq futures dropped 0.7%, while EUROSTOXX 50 futures in Europe rose 0.3%, DAX futures increased 0.2%, and FTSE futures gained 0.2%. The 30-year Treasury yield reached 5.5173%, near its highest since 2004, after climbing 27 basis points this month, with two-year yields surging 55 basis points in anticipation of Fed hikes.

Mark Cabana, a rate strategist at Bank of America, anticipates further bond selling as markets price higher Fed Funds for an extended period. The rising yields increase borrowing costs globally, impacting tech firms as they finance AI expansion and raise the discount applied to company earnings. The US data calendar is jam-packed with inflation, GDP, manufacturing, and jobs reports, with the September payrolls report expected to show an 85,000 gain and unemployment rate holding steady at 4.1%, with a potential dip to 4.0%.