Soaring oil prices coupled with inflationary pressure have triggered a dual sell-off in Asian stocks and bonds; Japanese equities plunged 3%, and Japanese bond yields continued to rise.

Oil prices breached the $100-per-barrel threshold, and the U.S. Producer Price Index (PPI) rose more than expected—two forces converging to push Asian markets into a dual sell-off across equities and bonds. On Friday, Asia-Pacific equities opened lower across the board: the MSCI Asia-Pacific Index fell 1.3%, with Japan and South Korea leading the decline. The Nikkei 225 index’s跌幅 widened to as much as 3%, while South Korea’s KOSPI index dropped 2.7%; Samsung Electronics and SK Hynix fell 3.8% and 4%, respectively. Bond markets faced similar pressure: Japanese and Australian government bond yields surged sharply in tandem with U.S. Treasuries. Australia’s three-year government bond yield jumped up to 20 basis points in a single day, reaching 5.05%—a multi-year high. The immediate catalyst for this selloff originated in U.S. markets. The yield on the U.S. 10-year Treasury note hit 4.97%, the highest since October 2023; overnight, U.S. equities declined—the Dow Jones Industrial Average fell over 300 points, while both the S&P 500 and Nasdaq Composite dropped roughly 0.6%–0.7%. All three major indices closed lower for the fourth consecutive trading day. Markets are now focused on Friday’s release of the U.S. August CPI report, which will directly influence the Federal Reserve’s interest-rate decision on September 16. Oil breaks above $100 amid supply concerns igniting market volatility The core driver behind this market turmoil lies in the energy sector. Brent crude climbed near $110 per barrel during U.S. trading hours, while WTI crude rose another 0.6% on Friday to $103.05 per barrel—both marking their highest settlement levels since May 19 this year. Behind the surge in oil prices is escalating tension in the Strait of Hormuz. The U.S.-Iran conflict has now lasted seven months, and attacks against vessels transiting this critical waterway have increased steadily—driving up prices for oil, natural gas, and diesel—and raising market concerns that higher energy costs will further feed inflation. Iran stated it would not back down in the face of a U.S. naval blockade and threatened to escalate its response if the U.S. continues striking Iranian territory. Warren Patterson, Head of Commodities Strategy at ING, said: “Rising oil prices pose a significant concern ahead of the midterm elections. For oil prices to climb substantially further, recent geopolitical escalation would need to actually disrupt oil flows through the Strait of Hormuz.” PPI surprises to the upside, boosting market bets on Fed rate hikes The energy shock and inflation data reinforced each other, further strengthening market expectations of additional Fed rate hikes. The U.S. PPI for August rose 0.4% month-on-month—the largest monthly gain since May this year—and 5.4% year-on-year. Following the data release, interest-rate swap markets priced in a roughly 70% probability of a Fed rate hike next week and fully priced in a rate increase for October.

Markets await the U.S. nonfarm payrolls report! Asia-Pacific equities under pressure; the Nikkei 225 falls over 1%, Hong Kong’s Hang Seng Tech Index drops over 2%; gold remains below $4,200.

Dovish signals from Federal Reserve officials, combined with safe-haven demand driven by mounting fiscal risks in Europe, prompted U.S. Treasury yields to retreat from multi-year highs. Asia-Pacific bond markets followed suit with gains on Friday—but equity markets overall remained under pressure, while gold oscillated narrowly amid competing bullish and bearish forces. On Friday, October 2, Asia-Pacific equities broadly weakened: both Korean and Japanese markets posted losses—the Nikkei 225 and the Topix each fell 1%, while South Korea’s KOSPI edged down 0.1%. In China, A-shares were closed for the National Day holiday; Hong Kong equities opened sharply lower and continued declining, with both the Hang Seng Index and the Hang Seng Tech Index plunging over 2%. Major tech-related stocks weighed heavily on the index. Fed Vice Chair Philip Jefferson stated that policymakers should allow more time to assess economic conditions before deciding whether further rate hikes are warranted. As a result, market pricing for a Fed rate hike in October dropped sharply—from around 70% earlier this week to approximately 27%. Meanwhile, rising fiscal risks in Europe—worsening political and debt outlooks in France—sparked investor concerns about contagion risk, prompting capital inflows into U.S. Treasuries for safety. The yield on the 10-year U.S. Treasury retreated from its 2024 high and stabilized near 5.25% on Friday. Escalating Middle East tensions added another layer of complexity. The U.S. Department of Defense may deploy an additional aircraft carrier and approximately 10,000 Marines to the Persian Gulf. Brent crude rose 0.4% on Friday to $102.74 per barrel. Persistently high oil prices continue pressuring inflation expectations—raising questions about the sustainability of the current U.S. Treasury rebound. Investors’ attention also turned to Friday’s upcoming U.S. nonfarm payrolls report, seen as a key source of fresh clues regarding the Fed’s policy path. Asia-Pacific bond markets rally alongside U.S. Treasuries; equities weaken Thursday’s U.S. Treasury rally lifted government bond prices across the Asia-Pacific region. Japanese, New Zealand, and Australian government bond prices all rose, supported by falling U.S. Treasury yields and dovish comments from Fed officials. Yet overall sentiment toward Asia-Pacific equities remained cautious. The MSCI Asia-Pacific equity benchmark index fell 0.3%, with Japanese and Korean indices both slipping. Technology stocks proved relatively resilient, suggesting underlying market confidence in the tech sector remains intact. In foreign exchange markets, the yen held steady near JPY 158 per USD. Tokyo-core CPI data came in higher, reinforcing the Bank of Japan’s stance of continuing its tightening cycle—providing some support to the yen, albeit limited. Gold oscillates narrowly amid multiple countervailing forces Gold prices stabilized modestly amid falling U.S. Treasury yields and dovish Fed signals. Spot gold stood at $4,182.20 per ounce at 8:00 a.m. Singapore time on Friday, up 0.1%. Silver rose 0.3% to $61.14 per ounce, while platinum and palladium also edged higher. Nonetheless, gold remains under considerable pressure. Persistently elevated U.S. Treasury yields dragged gold down roughly 6% in September, and it remains down about 2% for the week. After rising 0.4% in the prior session, the Bloomberg Dollar Spot Index was essentially flat on Friday—its ongoing strength continuing to cap gold’s upside potential. Hebe Chen, Senior Market Analyst at Vantage Global Markets, remarked: “Gold appears calm on the surface—but beneath lies powerful, conflicting currents.”

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