Asia Markets Slide as Oil Spikes and Rate Hikes Loom

Share markets across Asia slipped on Monday as fresh supply concerns pushed oil prices higher, while investors braced for potential interest rate hikes in both the United States and Japan this week. The combination of elevated crude and tightening monetary policy is testing equity valuations across the region, with tech-heavy indices bearing the brunt of the selloff.

Why are oil prices rising again?

Brent crude climbed 3 per cent in early trading, building on last week's near 9 per cent gain, after new strikes on Saudi Arabia and on ships in the Gulf renewed fears of wartime disruption to global energy supplies. An attack on a Saudi oil pipeline and advances by Yemen's Houthis have heightened concerns, while a planned meeting in Oman between Iran and Gulf Arab states to discuss opening the Strait of Hormuz was postponed.

With shipping through the strait and the Bab el-Mandeb under threat, analysts warn that oil prices could remain elevated for a prolonged period, stoking inflation globally. Brent futures were last up 2.6 per cent at $107.36 a barrel, while U.S. crude rose 2.4 per cent to $102.48.

How are markets reacting to the Fed's expected hike?

An uncomfortably hot U.S. consumer price report on Friday led markets to price in an 86 per cent chance that the Federal Reserve will lift rates by 25 basis points on Wednesday, with another move possible by December. It would be the first hike since mid-2023.

Michael Feroli, chief U.S. economist at JPMorgan, said: “We now expect the Fed to hike twice this year, in September and December. At this stage, failing to back up words with action could put the credibility of the institution at risk.” He added that whether these actions represent a limited recalibration or the start of a more sustained hiking cycle will depend on incoming data.

Japan's Nikkei fell 1.7 per cent, South Korea dropped 3.3 per cent, and MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.8 per cent. European futures also pointed lower, with EUROSTOXX 50 down 0.5 per cent and Nasdaq futures losing 1.1 per cent.

High yields test equity valuations

Yields on 10-year Treasury notes were a fraction lower at 4.967 per cent, having been sold heavily in recent weeks. Just last week, 2-year yields rose 26 basis points and 10-year yields added 19 basis points as the curve flattened.

Ben Snider, chief U.S. equity strategist at Goldman Sachs, noted that strong corporate earnings should provide support for Wall Street if borrowing costs rise. “Equities typically struggle when the Fed starts to hike rates, but we expect the bull market to continue,” he said. “The S&P 500 has generated an average three-month return of -2 per cent at the start of seven hiking cycles during the last few decades. Yet the S&P 500 has generated an average return of +9 per cent during the 12 months following the first hike.”

What about the Bank of Japan and the yen?

Markets imply around a 76 per cent chance that the Bank of Japan will lift its cash rate by a quarter point to 1.25 per cent when it meets on Friday. The BOJ is expected to sound hawkish on further tightening as it struggles to prevent a relapse in the yen after market intervention helped pull it from a 40-year low.

The dollar was holding at 153.49 yen, having fallen around 4 per cent over the last two weeks and away from a July peak of 163.99. The euro was little changed at $1.1592, while sterling was flat at $1.3522 with the Bank of England expected to hold rates at 3.75 per cent on Thursday.

Commodities and gold

Gold slipped 0.3 per cent to $4,336 an ounce, as higher bond yields diminished the lure of the non-interest-paying metal. The broader commodity complex remains under pressure from the dual forces of supply shocks and monetary tightening.

What does this mean for ASEAN markets?

For ASEAN economies, the combination of higher oil prices and U.S. rate hikes poses a twin challenge: imported inflation and capital outflows. Singapore's MAS, known for its exchange-rate-based monetary policy, may face renewed pressure to tighten, while other regional central banks will watch the Fed's move closely. The resilience of regional supply chains and domestic demand will be key buffers, but the near-term outlook remains clouded by global headwinds.

As the week unfolds, all eyes will be on the Fed's decision Wednesday, the BOJ's meeting Friday, and any further developments in the Gulf. For now, investors across Asia are bracing for a bumpy ride, with oil and rates dictating the mood.