U.S. forces struck Iranian rocket launchers on the Strait of Hormuz, triggering a surge in crude oil prices and a retreat in stock futures across Asia and the United States as global markets assess the renewed Middle East military action.
Global financial markets opened the week under pressure following a sudden military escalation in the Middle East. U.S. forces struck Iranian rocket launchers located near the Strait of Hormuz, marking the first military action in a month according to the Associated Press. The Trump administration just days earlier had shifted its focus to economic pressure, and a return to open conflict would be dangerous for the region. The strike abruptly interrupted a period of relative calm that had seen traders steadily removing war risk premiums from global energy supplies.
Crude Oil Prices Spike as War Premiums Return to the Market
Energy markets reacted swiftly to the resumption of hostilities in a critical shipping lane. Brent crude, the international benchmark, climbed 2.9% to reach $90.61 per barrel in early Monday trading. Meanwhile, U.S. benchmark crude oil advanced 2.7% to settle at $85.66 per barrel.
The Middle East had finally gone quiet enough for oil traders to start sanding some of the war premium out of crude. Then Sunday arrived, with a reminder that quiet in the Strait of Hormuz is not the same as peace,
Stephen Innes of SPI Asset Management
Stock Futures and Asian Equities Retreat on Geopolitical and Monetary Concerns
The geopolitical shock wave rippled directly into equity and futures markets. In the United States, Dow Jones futures, S&P 500 futures, and Nasdaq futures all declined modestly Sunday night. S&P 500 and Dow Jones Industrial Average futures both slipped 0.3% in early Monday activity. On Friday, the S&P 500 fell 0.2%, the Dow industrials dipped by less than 0.1%, and the Nasdaq composite fell 0.5%.
Asian stock exchanges also trended downward. In Tokyo, the Nikkei 225 dropped 0.4% to 66,164.66, South Korea’s Kospi lost 0.5% to 6,757.67, and Hong Kong’s Hang Seng index gave up 0.4% to 25,479.52. Elsewhere in the region, Australia’s S&P/ASX 200 lost 0.2% to 9,076.80, Taiwan’s Taiex fell 0.4%, and the Sensex in India slipped 0.6%. Bucking the regional trend, the Shanghai Composite index managed a 0.4% gain to 3,967.94, even as an official survey released Monday showed Chinese factory activity remained in contraction for a second straight month in August, though there were slight improvements in some areas such as new export orders and production.
Federal Reserve Policy Expectations and Treasury Yields
Beyond the immediate geopolitical tensions, investors continued digesting stringent monetary policy signals delivered ahead of the weekend. Markets across Asia and the U.S. faced pressure following a speech delivered Friday at an annual economic symposium held in Jackson Hole, Wyoming, by Fed Chairman Kevin Warsh. The speech reinforced expectations that the U.S. central bank will do what is needed, such as raising rates, to bring inflation down despite possible short-term pain for the economy. U.S. President Donald Trump, who appointed Warsh, has emphasized he wants lower interest rates. Warsh was adamant again on Friday that he wants to give financial markets fewer clues about what the Fed plans to do with rates for its two jobs of keeping inflation low and the job market strong, but he also said short-term interest rates are the predominant tool
for the Fed to do its job.
Bond markets reacted sharply in what is seen as a big move. The yield on the two-year Treasury, which closely tracks expectations about Fed moves, jumped to 4.35% from 4.22% just before Warsh’s speech. Worries had grown that his tough talk about getting inflation down to the Fed’s 2% target may be just that, and that the Fed could hike short-term interest rates to get price increases under control even though it could slow the economy and hurt prices for investments. Longer-term yields also rose following some initial zigzags, with the 10-year Treasury yield climbing to 4.72% from 4.67% late Thursday, and the 30-year Treasury yield getting to 5.21% from 5.19%. Yields for longer-term bonds have risen this summer, in part because of worries that inflation will remain high.
Foreign Exchange Movements and Upcoming Market Catalysts
In foreign exchange trading, the U.S. dollar fell to 159.85 Japanese yen from 160.10 yen. It has rebounded after a rare coordinated intervention by the U.S. Treasury and Japanese regulators in late July. Meanwhile, the euro rose to $1.1588 from $1.1580.
Market participants are also watching upcoming corporate milestones in the region, including shares in e-commerce and fast fashion giant Shein, which are due to begin trading in Hong Kong on Tuesday in the city’s biggest initial public offering this year, part of a trend toward big Chinese-founded companies raising funds in Chinese markets. Whether the combination of renewed geopolitical conflict in the Strait of Hormuz and tightening monetary policy will alter broader equity trajectories remains to be seen as the trading week unfolds.
