The Japan Times - Stocks tumble as oil and inflation worries fan rate hike bets

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Stocks tumble as oil and inflation worries fan rate hike bets

Stocks tumble as oil and inflation worries fan rate hike bets

Asian stocks sank on Friday after oil prices and bond yields spiked as the Middle East crisis stoked supply concerns and a forecast-topping US inflation report ramped up rate hike bets.

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Crude prices dropped in afternoon trade, but they have soared around 30 percent over the past week as the US and Iran exchanged strikes around the Strait of Hormuz. Tehran has also said it is prepared for a more intense conflict.

At the same time, Yemen's Houthis have hit several Saudi Arabian energy targets in a drive towards another key waterway that could cut off a crucial alternative route for global energy.

The rebels seized control of the strategic Red Sea port city of Mocha on Thursday.

Brent oil almost touched $110 per barrel on Friday -- its highest since May -- and the US benchmark West Texas Intermediate hit a peak of more than $104, last seen around the same time.

They later dropped more than one percent on Friday but are well up from the $78 and $74 seen last week.

With the war showing no sign of ending, investors are bracing for another surge in inflation that will put pressure on central banks to tighten monetary policy further.

In turn, government bond yields have jumped again this week to levels last seen during the global financial crisis. The 30-year Treasury yield reached 5.36 percent, a new post-2007 peak.

The 10-years are close to five percent and nearly at a 19-year high.

Adding to pressure on bonds was a $6 billion government buyback that disappointed traders who had expected a bigger number.

The European Central Bank lifted rates on Thursday and warned of an extended period of rising prices, and eyes are now on the Federal Reserve's policy meeting next week.

That comes after the release later on Friday of the US consumer price index, with a strong figure likely to force the policymakers to hike.

- Cost pressures rising -

Investors see a more than 70 percent chance that officials will opt for a quarter-point lift, according to CME Group's FedWatch tool.

The report comes a day after figures showed the producer price index accelerated to 5.4 in August, driven by energy prices. That was up from 4.8 percent in July and more than expected.

"The data suggests that cost pressures in the economy are rising and could feed through into higher consumer price inflation, strengthening expectations that the Federal Reserve may need to keep interest rates higher for longer or raise them further," said Fiona Cincotta at FOREX.com.

Risk assets are taking a hit with oil continuing to rise, rate expectations growing and the war rumbling on.

After all three indexes on Wall Street ended deep in the red, along with Europe, Asia followed suit.

Tokyo and Seoul -- which are filled with tech firms that rely on cheap debt to fuel investments -- were among the worst hit, while Hong Kong, Shanghai, Sydney, Singapore, Taipei, Mumbai, Wellington, Bangkok and Manila also suffered heavy selling.

London opened slightly higher after data showed the UK economy saw surprising growth in July, providing a boost to Prime Minister Andy Burnham and his finance minister John Healey ahead of the Labour government's budget update next month.

Paris and Frankfurt also advanced.

The increase in US rate expectations saw the dollar jump to more than 154.60 yen, having fallen for the past week to a low of 152.89 yen on bets for a series of hikes by the Bank of Japan.

"Attacks on shipping are now feeding directly into oil, natural gas and diesel prices," said Quintex Intel's Stephen Innes.

"Iran has shown no inclination to back away, and the longer the confrontation continues, the harder it becomes for markets to treat the energy shock as temporary.

"Temporary inflation, temporary supply shocks, temporary geopolitical premiums. Markets are generous with temporary problems because they can look through them, but what they hate is when temporary begins overstaying its visa, and oil is starting to do exactly that."

- Key figures at around 0715 GMT -

West Texas Intermediate: DOWN 1.4 percent at $101.08 per barrel

Brent North Sea Crude: DOWN 1.6 percent at $105.86 per barrel

Tokyo - Nikkei 225: DOWN 1.9 percent at 64,011.34 (close)

Hong Kong - Hang Seng Index: DOWN 0.6 percent at 24,817.02

Shanghai - Composite: DOWN 1.2 percent at 3,888.11 (close)

London - FTSE 100: UP 0.1 percent at 10,614.58

Dollar/yen: DOWN at 154.13 yen from 154.34 yen

Euro/dollar: DOWN at $1.1608 from $1.1609 on Thursday

Pound/dollar: UP at $1.3523 from $1.3510

Euro/pound: DOWN at 85.85 pence from 85.94 pence

New York - Dow: DOWN 0.6 percent at 52,064.10 (close)

K.Okada--JT