Market News

Oil prices spiked on Monday after a fresh flare-up in the US-Iran war, while stocks were mixed as hawkish comments from Federal Reserve boss Kevin Warsh saw investors ramp up bets on a US interest rate hike.

With inflation remaining stubbornly high, largely on the back of elevated energy costs, the US central bank has come under pressure to act, while Warsh’s refusal to provide guidance has stoked uncertainty.

But in a highly anticipated speech at the Jackson Hole symposium of central bankers and economists in Wyoming, he left traders with little doubt that he was prepared to increase borrowing costs.

Warsh said, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”

He described the spike in inflation, currently at 3.7 per cent and nearly double the Fed’s two-per-cent target, as “concerning” and said he would be “hard-pressed” to describe current financial conditions as “restrictive”, a potential hint that rate hikes could be on the horizon.

However, he stopped short of saying he would support a hike, adding, “I stand here today committed to a discipline, not to a decision.”

All three main indexes on Wall Street fell on Friday. Yields on short-term US Treasury bonds, which reflect monetary policy expectations, jumped, while the dollar rallied against its peers. Gold, which benefits from lower interest rates, fell.

Asian markets struggled in the morning, but some rallied as the day progressed, leaving some in positive territory and others just below Friday’s close.

Tokyo, Hong Kong, Sydney, Taipei, Jakarta and Mumbai ended lower, while Seoul, Shanghai, Singapore, Bangkok and Wellington rose.

Paris rose at the open, while Frankfurt dipped. London was closed for a holiday.

Focus will now turn to a string of crucial data releases over the next two weeks before the Fed makes its decision, with jobs data due this week and the consumer price index next week.

“Should we get an inline payrolls print that does not give the Fed too much to work with, next week’s core CPI report will become the major decider for the market’s Fed belief system,” wrote Chris Weston at Pepperstone.

“The volatility priced around that outcome across rates, forex and equities could therefore be significant.”

Still, Invesco’s David Chao added, “While Jackson Hole has increased the possibility of a rate hike, I don’t think a September rate hike is in the books.

The Fed’s battle against inflation has been complicated by the Iran war, which has pushed oil prices higher.

After declining for most of last week, oil prices spiked again on Monday, a day after the United States said it had attacked Iranian rocket launchers on a small island in the Strait of Hormuz, marking its first strikes on the country in a month.

The attack prompted Tehran to retaliate by hitting US military targets in Jordan. Both main crude contracts rose by more than two per cent on Monday.

The exchange came shortly after the US-Iran war entered its sixth month and at a time when hostilities had appeared to be subsiding.

The development revived concerns about the conflict, with peace talks appearing to be going nowhere and the strait, through which a fifth of global crude and gas passes, largely closed.

US officials this month vowed the “economic asphyxiation” of Iran to compel it to reopen the waterway.

“Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed,” said Quintex Intel’s Stephen Innes.

“For oil traders, the move is another reminder of how quickly the geopolitical premium can return.

“Physical flows through Hormuz have improved materially from their worst levels, which is precisely why crude had started giving back some of the fear premium, but the latest exchange shows how fragile that progress remains and how quickly the shipping story can be pushed back onto the trading desk.”

At around 0715 GMT, Tokyo’s Nikkei 225 was down 0.1 per cent at 66,311.93 points at the close, while Hong Kong’s Hang Seng Index fell 0.2 per cent to 25,530.19 points.

Shanghai’s Composite Index rose 0.9 per cent to 3,986.30 points at the close.

West Texas Intermediate crude rose 2.5 per cent to $85.51 per barrel, while Brent North Sea Crude gained 2.8 per cent to $90.53 per barrel.

The dollar fell to 159.87 yen from 160.07 yen on Friday, while the euro slipped marginally to 1.1586.

The pound rose to 1.3538, while the euro traded at 85.57 pence against the pound, compared with 85.58 pence on Friday.

On Wall Street, the Dow Jones Industrial Average closed flat at 53,559.99 points, while London’s FTSE 100 was closed for a holiday.