Stocks drop and oil rises as Hormuz hopes fade

Asian stocks mostly declined and oil prices surged on Tuesday (Sep 29) due to dwindling expectations of the Strait of Hormuz reopening, as the Federal Reserve is anticipated to raise interest rates again in the coming month. Hopes for easing Middle East tensions were shattered last weekend when Donald Trump rejected Iran's proposal for a seven-day truce.

Although he mentioned talks would resume this week, it was not enough to boost market sentiment, with traders anticipating further inflation increases that could lead to more stringent monetary policy tightening.

President Trump denied a report by Axios that he had offered Iran sanctions relief and the release of frozen funds, despite the news outlet's claim. The US president stated the story was a "HOAX" and urged the news site to retract it. Iran's state broadcaster reported that Foreign Minister Abbas Araghchi would meet with Qatari representatives, with talks expected to focus on messages exchanged with the United States through intermediaries, particularly concerning Iran's conditions for reopening the Strait of Hormuz.

However, Tehran officials privately expressed skepticism about reaching a deal to reopen Hormuz before November's US midterm elections, according to Bloomberg sources. The Strait of Hormuz is crucial for global oil and gas deliveries and has become a focal point of the US-Iran conflict, as Houthi rebels seized the entire Red Sea coast, including the Bab al-Mandab Strait, another crucial shipping lane.

Analysts remain cautious, expecting the conflict to persist and the global economy to continue adjusting to the impacts of supply disruptions. Ian Lyngen at BMO Capital Markets noted that both main crude contracts rose more than 1% on Tuesday, with expectations of upward pressure on fuel costs. The RAC motoring organization reported that average UK diesel prices hit a record high.

Equity markets suffered amid a decline across all three main US indexes on Wall Street, with Tokyo, Seoul, Hong Kong, Mumbai, Singapore, Taipei, Wellington, Jakarta, and Manila all in the red, while Shanghai and Sydney rose. Gold held onto its steep losses, trading around US$4,140 as traders bet on additional interest rate hikes, making the metal less appealing due to its non-interest-bearing nature.

Investors are also preparing for key US inflation and jobs data releases this week, which could influence the Federal Reserve's decisions, with markets pricing in a second consecutive rate hike by the end of October.

The main concern for markets isn't that employment conditions may deteriorate suddenly. Instead, strong non-farm payrolls (jobs) data, despite higher rates and energy prices, could strengthen the case for the Fed to maintain higher rates for an extended period or even raise rates again to curb inflation. In company news, fast-fashion giant Shein saw its shares plummet almost 14% in Hong Kong following the release of disappointing earnings, marking its first set of financial results since its IPO earlier in the month.