Oil prices rose again on Friday due to increased supply concerns. Asian stock markets plummeted on Friday as oil prices continued to climb and bond yields remained at multi-year highs. This occurred against the backdrop of an escalating crisis in the Middle East, which heightened supply fears, as well as due to a US inflation forecast that exceeded expectations and raised expectations for interest rate hikes.
Oil quotes jumped by more than 30 percent over the past week after the US and Iran exchanged strikes in the Strait of Hormuz area. Tehran, meanwhile, stated its readiness for more intense clashes. Simultaneously, Houthi rebels in Yemen attacked several Saudi Arabian energy facilities, aiming to gain control over another key maritime route that could block a vital alternative route for global energy.
Separatists captured the strategically important port of Mocha in the Red Sea on Thursday. The price of Brent crude nearly reached $110 per barrel on Friday—its highest level since May. The US benchmark West Texas Intermediate peaked above $104, a level last recorded around the same time.
As the war shows no signs of ending, investors are bracing for another wave of inflation, which will put pressure on central banks to demand further tightening of monetary policy. In turn, government bond yields surged again this week to levels seen during the global financial crisis. The yield on 30-year Treasury bonds reached 5.36 percent, a new high since 2007. The yield on 10-year bonds is approaching five percent and is near a 19-year high.
Pressure on the bond market was also amplified by a $6 billion government bond buyback program, which disappointed traders who had expected a larger amount. The European Central Bank raised rates on Thursday and warned of a prolonged period of price growth, and attention is now focused on the Federal Reserve meeting next week. This comes after the release of the US Consumer Price Index at the end of Friday; a strong figure is likely to force policymakers to raise rates.
According to the CME Group's FedWatch tool, investors see the probability of a quarter-point rate hike at over 70 percent. This report was released one day after data showed an acceleration in the producer price index to 5.4 in August, driven by energy prices. This is higher than the 4.8 percent in July and exceeded expectations.
Fiona Sinkotta from FOREX.com noted: 'The data indicates rising price pressures in the economy, which could translate into higher consumer price inflation, strengthening expectations that the Federal Reserve may be forced to keep interest rates higher for longer or raise them even further.' As oil prices continue to rise, rate expectations grow, and with the war ongoing, risk assets are declining. After all three Wall Street indices closed deep in the red, Europe followed suit, and then Asia.
Tokyo and Seoul, which are rich in technology companies dependent on cheap debt to finance investments, fell by more than two percent, while Hong Kong, Shanghai, Sydney, Singapore, Taipei, Wellington, and Manila also suffered from heavy selling.
Rising expectations for US interest rates led to a strengthening of the dollar against the yen, after it had fallen during the previous week due to the series of rate hikes by the Bank of Japan. Steven Innes from Quintex Intel stated: 'Attacks on shipping are now directly impacting oil, natural gas, and diesel prices.' He added: 'Iran shows no inclination to back down, and the longer the confrontation continues, the harder it is for markets to view the energy shock as temporary. Markets are generous to temporary problems because they can ignore them, but they hate it when the temporary becomes protracted, and oil is starting to do just that.'
Key figures around 4:30 AM (Saudi Arabia time)
West Texas Intermediate: UP 0.1 percent at $102.58 per barrel
Brent North Sea Crude: UP 0.1 percent at $107.76 per barrel
Tokyo - Nikkei 225: DOWN 2.8 percent at 63,469.39 (close)
Hong Kong - Hang Seng Index: DOWN 1.2 percent at 24,666.56
Shanghai - Composite: DOWN 1.7 percent at 3,868.25
Dollar/Yen: UP to 154.46 yen from 154.34 yen
Euro/Dollar: DOWN to $1.1611 from $1.1609 on Thursday
Pound/Dollar: DOWN to $1.3507 from $1.3510
Euro/Pound: UP to 85.95 pence from 85.94 pence
New York - Dow: DOWN 0.6 percent at 52,064.10 (close)
London - FTSE 100: DOWN 0.6 percent at 10,608.92 (close)