Asian stocks sank on Friday as oil prices and bond yields spiked, driven by heightened supply concerns due to the Middle East crisis and a forecast-topping US inflation report that intensified bets on rate hikes. The escalating tensions in the region, including strikes between the US and Iran around the Strait of Hormuz and Houthi attacks on Saudi Arabian energy targets, have sent crude prices soaring by around 30 percent over the past week. Brent oil nearly reached $110 per barrel, its highest since May, while the US benchmark West Texas Intermediate peaked at over $104.
The ongoing conflict and the seizure of the strategic Red Sea port city of Mocha by Yemen's Houthis have raised fears of further disruptions to global energy supplies. These developments have put pressure on central banks to consider tightening monetary policy further. Government bond yields have jumped, with the 30-year Treasury yield hitting 5.36 percent, a new post-2007 peak, and the 10-year yield nearing five percent.
The European Central Bank's recent rate hike and warning of extended price rises, coupled with the upcoming Federal Reserve policy meeting, have added to market jitters. Investors are closely watching the US consumer price index release, expected to show strong figures that could prompt the Federal Reserve to opt for a quarter-point rate increase. According to CME Group's FedWatch tool, there is more than a 70 percent chance of such a move.
The surge in oil prices and rate hike expectations has hit risk assets hard. Following deep losses on Wall Street and in Europe, Asian markets followed suit. Tokyo and Seoul, home to tech firms reliant on cheap debt, were among the worst hit, along with Hong Kong, Shanghai, Sydney, Singapore, Taipei, Mumbai, Wellington, Bangkok, and Manila. In contrast, London saw a slight increase after data indicated surprising UK economic growth in July.
The increase in US rate expectations has also bolstered the dollar, which jumped to over 154.60 yen. Analysts warn that the ongoing attacks on shipping are directly impacting oil, natural gas, and diesel prices. Stephen Innes of Quintex Intel noted that the longer the confrontation continues, the harder it becomes for markets to view the energy shock as temporary, potentially leading to sustained inflationary pressures.
