Aug 31: Global stock markets started the week on a cautious note as renewed fighting between the United States and Iran pushed crude oil prices higher and strengthened concerns that rising inflation could delay or reverse interest-rate cuts in the US.
Asian equities slipped in early trading, while US and European stock futures also pointed to a weaker opening. Japan’s Nikkei, South Korea’s Kospi and Hong Kong’s Hang Seng were among the major markets trading lower as investors assessed the latest developments in the Middle East.
The immediate pressure on markets came from a sharp rise in crude prices. Brent crude climbed about 2.7 per cent to $90.51 a barrel after US forces struck Iranian rocket launchers on Larak Island near the Strait of Hormuz. The latest escalation has raised fresh concerns about possible disruption to one of the world’s key energy shipping routes.
For equity markets, the rise in oil prices creates a difficult combination. Higher energy costs can add to inflation, increase operating expenses for companies and make it harder for central banks to ease monetary policy. This is particularly negative for rate-sensitive sectors and highly valued growth and technology stocks.
US Treasury yields also remained elevated after Federal Reserve Chair Kevin Warsh adopted a firm stance on inflation. Markets have increased their expectations of a September rate hike, putting additional pressure on equities and increasing volatility in bond and currency markets.
Technology stocks could remain particularly vulnerable if yields stay high. The sector has been a major driver of the recent Wall Street rally, but higher borrowing costs can reduce the appeal of richly valued growth companies. Asian technology stocks were already among the major losers, with South Korean chipmakers coming under pressure.
The impact is also spreading across other sectors. Airlines, transport companies and businesses with high fuel consumption could face higher costs if crude remains elevated, while energy producers may benefit from stronger oil prices. Financial stocks could remain sensitive to changing rate expectations and movements in bond yields.
Despite the cautious start, Wall Street is heading towards the end of August with strong monthly gains. The Dow Jones is on course for its fifth consecutive monthly advance, while the S&P 500 and Nasdaq have also posted gains, led largely by technology and artificial-intelligence related stocks.
Investors will now closely watch the US jobs report, manufacturing and services data and developments from the G20 meeting for clues about the direction of monetary policy. Strong economic data combined with persistent inflation could further strengthen rate-hike expectations, while weaker data could ease pressure on markets.
With oil prices, interest rates and geopolitical tensions moving markets simultaneously, global equities are likely to remain volatile as investors close out August and reposition portfolios for September.