Asian stocks slid on Thursday as the biggest wave of attacks on shipping in the widening war in the Middle East kept oil prices above $US100 ($A138) a barrel, leaving investors nervous ahead of US inflation data that will influence monetary policy.
Benchmark 10-year US Treasury yields held steady at 4.8406 per cent after scaling their highest since 2023 in the previous session as the Treasury Department announced a $US6 billion ($A8.3 billion) buyback of longer-dated bonds that disappointed some investors who had wanted more.
Brent crude futures edged up to $US101.4 ($A140.3) per barrel in early trading, having broken through the psychologically crucial $US100 ($A138) mark on Wednesday for the first time since July as traders grappled with the prospect of inflationary pressure.
“I think that Brent pushing through the $US100 ($A138) 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, who expects global yields to push higher as the market adjusts to higher inflation in the coming months.
“This move now may convince some market participants that may have been holding fire on certain positions, with hopes of a peace deal in the Middle East, to now hit the trigger as the realities of a longer conflict kick in.”
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.0 per cent. Japan’s Nikkei and South Korea’s KOSPI dipped more than 1.0 per cent.
“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.
There has also been an escalation in fighting between Saudi Arabia and the Houthis in Yemen, a second theatre of war that threatens global energy supplies from the Middle East as the six-month conflict shows no signs of easing.
Higher oil prices and elevated bond yields have weighed on investor sentiment, setting the stage for the series of central bank meetings in the coming days.
The euro was little changed at $US1.16322 ($A1.6095) ahead of the European Central Bank policy decision where it is expected to raise rates. Market focus is likely to be on policymaker comments to gauge further moves. The Fed and the Bank of Japan are due next week.
US producer price and consumer price inflation reports are due later on Thursday and Friday, respectively, with analysts saying the data will play a key role in whether the Fed hikes rates at its September 15 to 16 meeting.
Fed funds futures traders are pricing in about 60 per cent odds of a rate hike next week.
“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 BOJ is widely expected to raise interest rates and analysts say the communication from officials will need to be hawkish to sustain the recent yen rally. The Japanese yen was at 153.63 per US dollar, having firmed 4.0 per cent in September.
The sharp rise has been driven by heightened expectations of faster BOJ rate hikes, traders exiting short positions in the Japanese currency and early signs of a potential rush of repatriation of Japanese capital.
“Failure to deliver a hike, alongside clearer signals of a faster pace of tightening next week, will likely trigger a sharp renewed weakening of the yen,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia, who expects a hike next week and another two in December and April.
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