WEB DESK: Global financial markets came under renewed pressure as oil prices surged following an escalation in Middle East tensions, prompting investors to increase bets on further interest-rate hikes.
Crude prices climbed more than 2% in the latest session and have gained roughly 10% this week after the United States carried out a strike on an Iranian island in the Strait of Hormuz.
The attack was followed by a series of retaliatory strikes, with Iran targeting US interests in several countries across the region.
The renewed confrontation comes after weeks of relative calm, during which diplomatic efforts failed to produce a breakthrough. Washington has also warned of pursuing measures aimed at imposing severe economic pressure on Tehran.
Hormuz disruption fuels inflation fears
Investor concerns have intensified over the potential economic fallout from disruption in the Strait of Hormuz, a critical global energy route through which roughly one-fifth of the world’s oil and gas supplies transit.
With the waterway expected to remain severely disrupted for the foreseeable future, markets are increasingly pricing in prolonged pressure on energy costs and renewed inflationary risks.
Higher oil prices, combined with concerns over government spending and a wave of corporate borrowing, have pushed expectations for interest-rate increases higher and driven government bond yields upward.
UK borrowing costs have climbed sharply, with the 30-year gilt yield reaching its highest level since 1998. The 10-year yield has also risen to levels last seen during the 2007-08 global financial crisis.
Japan’s 10-year government bond yield has reached a three-decade high, while the yield on 30-year US Treasuries is approaching its 2007 peak. The benchmark US 10-year yield has likewise moved into territory associated with the financial crisis.
“Bond yields were already rising and the renewed US-Iran attacks and their impact on oil prices have made investors more concerned about bonds,” said Rajeev De Mello of Gama Asset Management.
He warned that elevated borrowing costs could weigh particularly heavily on Asian equities, including technology companies whose investment models are more sensitive to higher interest rates.
Asian stocks retreat
Major Asian markets moved lower, with technology shares leading declines in Tokyo and Seoul as investors assessed the impact of tighter financial conditions.
Hong Kong, Shanghai, Sydney, Singapore, Wellington, Taipei and Manila also recorded significant losses.
The regional sell-off followed declines across all three major US stock indexes on Wall Street.
Fed decision comes into focus
Markets are now turning their attention to upcoming US employment and inflation figures, which could play a decisive role in determining the Federal Reserve’s next policy move.
According to Bloomberg, traders are currently assigning a 70% probability to another rate increase at the Fed’s meeting in two weeks.
Fed Governor Michael Barr added to expectations of tighter policy, saying policymakers should be ready to raise rates if inflation remains persistently above the central bank’s 2% target.
Barr said that if incoming data showed inflation was steadily moving towards the target, policymakers could afford to wait and assess conditions.
However, he warned that a lack of sufficient progress on inflation would require the Federal Reserve to respond decisively with higher interest rates.
The combination of elevated energy prices, geopolitical uncertainty and persistent inflation has therefore created a difficult backdrop for global investors, with markets increasingly preparing for a prolonged period of tighter monetary conditions.
