Stocks drop, yields at three-decade highs on Mideast flare-up ~ EconomyLens.com

Hong Kong (AFP) – Stocks fell and bond yields held at multi-decade highs on Wednesday as investors ramped up rate hike bets amid a fresh flare-up in Middle East tensions that has sparked another surge in oil prices. Crude has spiked nearly 10 percent since the United States hit an Iranian island in the Strait of Hormuz at the weekend, sparking a series of tit-for-tat attacks in which Tehran has targeted American interests in several regional countries.

The latest round of military action comes after weeks of relative calm during which peace talks went nowhere, and Washington said it would aim for the “economic asphyxiation” of the Islamic republic. With the strait — through which about a fifth of world oil and gas passes — effectively closed for the foreseeable future and energy costs unlikely to come down, inflation fears are growing. That, along with worries over government spending and a flood of corporate debt sales, has sent rate hike expectations surging, putting upward pressure on government borrowing costs.

The yield on 30-year UK government bonds is at its highest since 1998, while those for 10-year debt are at the level last seen during the global financial crisis of 2007-08. Japan’s 10-year bond yield is at a 30-year high, 30-year US Treasuries are just short of their 2007 mark, and the US 10-year yield is also at financial crisis levels.

“Bond yields were already rising, and the renewed US-Iran attacks and their impact on oil prices have made investors more concerned about bonds,” Rajeev De Mello at Gama Asset Management said. “At these levels, higher yields are clearly a headwind to Asian equities, especially longer duration tech stocks.”

Markets across Asia were down, with tech firms — which rely on low borrowing rates to fuel their investments — battering Tokyo 3.9 percent and Seoul four percent. Hong Kong, Shanghai, Sydney, Taipei, Mumbai, Bangkok, Jakarta, and Manila were also down. London, Frankfurt, and Paris fell in the morning. The selling followed losses across all three main indexes on Wall Street.

Investors are gearing up for the release of key data on jobs and inflation over the next week that could determine whether the Federal Reserve hikes rates at its next meeting in two weeks. Traders are pricing in a 70 percent probability of a hike, according to Bloomberg. Fed governor Michael Barr stoked expectations by saying decision-makers should be prepared to hike if inflation stays stubbornly above the bank’s two-percent target, which it has been for more than five years.

“If trends in the data give me some confidence that inflation is moderating on a path to two percent, then I think we can take a bit more time to assess our policy stance,” he said in prepared remarks. “However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.”