Stocks slip in Asia as oil climbs, bonds retreat

Asian stock markets experienced a decline on Monday as oil prices surged due to uncertainty surrounding a potential truce between the United States and Iran. The prospect of a deal appeared to be far from imminent, according to U.S. President Donald Trump, who dismissed an Iranian proposal to reopen the Strait of Hormuz and vowed to continue ongoing talks.

Brent crude futures climbed 2.1% to $106.49 a barrel, marking almost an 18% gain this month, while U.S. crude futures rose 1.5% to $93.84 a barrel. The limited refining capacity led to diesel prices reaching record highs, posing concerns about inflation's potential impact on pricing and wage decisions.

Central banks responded to the rising energy prices with a series of interest rate hikes. The Reserve Bank of Australia is expected to tighten monetary policy soon when it meets on Tuesday. Market expectations now suggest a 66% chance of the Federal Reserve raising rates for a second consecutive meeting in October, with around 90 basis points of tightening priced in until late next year.

Concurrently, robust U.S. economic data has bolstered expectations for corporate earnings, even as bond yields continue to surge, supporting equity prices.

The Atlanta Fed's GDPNow forecast anticipates strong growth of 5.0% for this quarter. Asia and Europe have also shown positive activity, driven partly by an AI investment boom. According to Bruce Kasman, chief economist at JPMorgan, the global expansion is exhibiting broad-based strength rarely observed in the past two decades. Despite strong growth and the perception of resilience to high energy prices, bond yields remain elevated, while equity prices are near record levels.

Notably, the recent market movements have extended higher policy rates well beyond the coming year. Japan's Nikkei index remained unchanged, while South Korea's stock market dropped 2.4%. The MSCI Asia-Pacific index (excluding Japan) fell 0.6%, and Chinese blue chips declined 1.4%, marking a month-over-month loss of more than 5%. On Wall Street, S&P 500 futures slipped 0.3%, and Nasdaq futures declined 0.5%. In Europe, EUROSTOXX 50 futures increased 0.4%, while DAX futures rose 0.3% and FTSE futures gained 0.2%.

Yields on 30-year Treasuries rose to 5.5185%, nearing their highest level since 2004, after climbing 27 basis points this month. Two-year yields have surged 55 basis points in anticipation of Federal Reserve rate hikes. Mark Cabana, a rate strategist at Bank of America, anticipates further bond sell-offs as markets price higher Federal Funds rates.

The rising yields will increase borrowing costs globally, coinciding with tech firms raising billions to fund AI expansion, and increasing the discount applied to company earnings.

The U.S. data calendar is packed with inflation, GDP, manufacturing, and jobs reports. The forthcoming September payrolls report on Friday is expected to show an increase of 85,000, with the unemployment rate remaining steady at 4.1%, with a chance of a slight dip to 4.0%. The robust U.S. dollar index touched a two-month high of 101.39, while the euro fell to $1.1380, down 2.0% for the month.

The U.S. dollar edged up 0.3% to 157.73 yen, recovering from a decline on Friday after Japanese Finance Minister Satsuki Katayama expressed concerns about yen weakness. In commodity markets, gold declined 1.7% to $4,212 an ounce, having lost more than 4% this month due to rising yields.