Asian shares slide as oil spike fuels inflation, rate hike concerns

Japan's Nikkei fell 1.7%, while South Korea dropped 3.3%. MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.8%. | Image: Bloomberg

Share markets slid in Asia on Monday as supply concerns caused oil prices to spike anew, while investors braced for possible interest rate hikes in both the United States and Japan this week.

Brent climbed 3% as new ​strikes on Saudi Arabia and on ships in the Gulf tested nerves, after an attack on ​a Saudi oil pipeline and an advance by Yemen's Houthis threatened to worsen the wartime disruption to global energy supplies.

A meeting ‌in Oman between Iran and Gulf Arab states, scheduled for Monday to discuss a deal on opening the Strait of Hormuz, was postponed.

With shipping through the strait and the Bab el-Mandeb under threat, analysts fear oil prices could stay elevated for a lengthy period, stoking inflation globally.

An uncomfortably hot US consumer price report on Friday led markets to price in an 86% chance the Federal Reserve will lift rates by 25 basis points on Wednesday, and move again by December. It would be the first hike since mid-2023.

"We now expect the Fed to hike twice this year, in September and December," said Michael Feroli, chief US economist at JPMorgan. "At this stage, failing to back up words with action could put the credibility of the institution at risk."

"Whether these actions represent a limited recalibration or mark the start of a more sustained hiking cycle will depend on incoming data," he added. "We anticipate the former scenario but see risks for ‌the latter."

Brent futures were last up 2.6% at $107.36 a barrel, having gained almost 9% last week, while US crude rose 2.4% to $102.48 a barrel. Japan's Nikkei fell 1.7%, while South Korea dropped 3.3%. MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.8%.

In Europe, EUROSTOXX 50 futures lost 0.5%, while DAX futures fell 0.4% and FTSE futures dipped 0.1%. On Wall Street, S&P 500 futures lost 0.5%, while Nasdaq futures fell 1.1%.

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

Ben Snider, chief US ​equity strategist at Goldman Sachs, said 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 added. "The S&P 500 has generated an average three-month return of -2% at the start of seven hiking cycles during the last few decades."

"Yet the S&P 500 has generated an average return of +9% ​during the 12 months ‌following the first hike."