BY COMFORT OGBONNA
Asian stocks fell on Thursday as escalating attacks on shipping in the Middle East pushed oil prices above $100 a barrel, heightening concerns about inflation and the potential impact on interest rates.
The selloff came as investors awaited key U.S. inflation data that could influence expectations for Federal Reserve policy at its upcoming meeting. Rising energy prices, combined with elevated bond yields, have increased uncertainty over the outlook for global monetary policy.
Brent crude futures eased to $101.11 a barrel after breaking above the $100 threshold on Wednesday for the first time since July. The move has raised concerns that a prolonged disruption to Middle Eastern energy supplies could feed into consumer prices and complicate efforts by central banks to control inflation.
“I think that Brent pushing through the $100 level will be seen by many in the market as a significant event in the current scheme of things,” said Nick Twidale, chief market strategist at ATFX Global.
Twidale said traders who had been waiting for a potential peace agreement in the Middle East could now “hit the trigger as the realities of a longer conflict kick in.”
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7%, while Japan’s Nikkei eased 0.4% and South Korea’s KOSPI declined 0.2%. European stock futures were up about 0.25% ahead of an expected European Central Bank interest-rate decision.
“Markets are facing a cocktail of headwinds in September which has historically not been the best seasonal month for stock markets,” said Vasu Menon, managing director of investment strategy at OCBC.
The latest market weakness followed a further escalation in fighting involving Saudi Arabia and the Houthis in Yemen, creating another potential threat to energy supplies from the Middle East. Investors are increasingly concerned that continued disruptions could keep oil prices elevated for an extended period.
Higher crude prices are particularly important for financial markets because they can increase transportation and production costs, potentially pushing inflation higher and reducing the room central banks have to cut interest rates.
The euro was little changed at $1.16322 ahead of the ECB’s decision. Investors were expected to focus closely on policymakers’ comments for clues about the path of interest rates.
The Federal Reserve and Bank of Japan are scheduled to meet next week, while U.S. producer-price and consumer-price inflation reports were due later Thursday and Friday, respectively. The data could play a major role in determining whether the Federal Reserve raises interest rates at its September 15-16 meeting.
Fed funds futures traders were pricing in roughly a 60% chance of a rate increase next week, according to market pricing cited in the report. Other market data has shown that expectations have shifted as investors weigh the effects of higher energy prices against broader inflation trends.
“The bond market is under pressure as oil prices reignite inflation fears. But it’s not just oil we should be watching,” said Prashant Newnaha, senior rates strategist at TD Securities.
“Agricultural commodities are now breaking out and they are likely to lift food’s contribution to CPI in coming months. At a minimum the stage is set for headline CPI remaining elevated until early 2027.”
The benchmark 10-year U.S. Treasury yield stood at 4.8407%, near its highest level since 2023. The yield had climbed sharply in the previous session even after the U.S. Treasury announced plans for a $6 billion buyback of longer-dated government bonds.
Investors had hoped the buyback program would help support the longer end of the Treasury market, but the size of the operation disappointed some participants. The 30-year Treasury yield had also climbed to its highest level since 2007, keeping pressure on global bond markets.
Japan’s yen traded at 153.63 per dollar after strengthening about 4% in September. The currency’s gains have been supported by expectations that the Bank of Japan could accelerate interest-rate increases, along with investors closing short positions against the yen and signs of Japanese funds being brought back home.
Bank of Japan board member Kazuyuki Masu has warned that the central bank could eventually be forced to raise rates more rapidly if inflation accelerates. His comments have added to expectations that policymakers could take a more hawkish stance at their upcoming meeting.
Investors are also watching the U.S. Treasury market closely after a prolonged selloff pushed long-term yields higher. Treasury Secretary Scott Bessent previously indicated that the government would increase buybacks of longer-dated bonds as part of efforts to manage the structure of its outstanding debt.
“Bessent has laid down the gauntlet to a group of sophisticated traders who don’t like to be told what to do,” said Matt Simpson, senior market analyst at StoneX. “He may win a battle or two, but he’ll only win the war if bond traders let him.”
With oil prices remaining above $100 and inflation data approaching, investors are now facing a combination of geopolitical risks, higher borrowing costs and uncertainty over central-bank policy. The direction of crude prices and the incoming U.S. inflation figures are likely to remain key drivers of financial markets in the days ahead.
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