Global markets slide on Fed hike bets, Middle East tensions

Global equity markets retreated on Tuesday as investors priced in aggressive Federal Reserve tightening amid renewed US-Iran military clashes that have sent Brent crude prices above $90 per barrel — stoking inflationary concerns across advanced economies and triggering a broad flight from risk assets.

Oil prices spike on Gulf supply threats

Crude benchmarks extended gains as Washington and Tehran exchanged threats following ballistic missile strikes on American air bases in Jordan. US President Donald Trump said Washington will retaliate against Iran after the attacks, raising fears of prolonged disruptions to energy flows through the Strait of Hormuz — a vital chokepoint for global oil shipments. December-delivery Brent crude climbed to $91.50 a barrel, marking a 3.6% jump on Tuesday, as supply concerns intensified across global energy markets.

Russia's decision to extend its diesel export ban through September 30 added further pressure on refined fuel supplies, contributing to the inflationary backdrop that has unsettled fixed-income investors and complicated monetary policy calculations for central banks worldwide. The US dollar rose 0.1% to 99.5 against a basket of currencies, while gold dropped 0.5% to $4,430 per ounce as safe-haven flows showed mixed patterns amid the escalating tensions.

Hawkish Fed expectations drive bond selloff

Expectations of an October rate hike by the Federal Reserve hardened as traders assessed hawkish comments from officials alongside rising energy costs. Fed Chair Kevin Warsh stated that economic growth in the US appears to have strengthened, adding that the central bank would address questions over capital expenditures and productivity at the latest G20 Finance Ministers and Central Bank Governors Meeting in Washington. US Treasury Secretary Scott Bessent told delegates that economic growth remains the top priority for the G20, according to statements from the gathering.

The US 10-year Treasury yield reached 4.79%, its highest level since January 2025, while Germany's 10-year bund yield hit a 15-year peak at 3.32% amid political uncertainty surrounding the rise of the far right in Europe. Japan's 10-year government bond yield touched 3% for the first time since 1996 following reports that Bessent urged the Bank of Japan to tighten policy more aggressively.

Germany's consumer price index rose 0.2% month-on-month and 2.9% year-on-year in August, slightly above expectations. The data reinforced concerns that inflationary pressures persist across the euro area despite earlier predictions of rapid disinflation.

Global equities retreat across regions

The New York Stock Exchange closed Monday with losses as the Dow Jones Industrial Average fell 0.7%, the S&P 500 dropped 0.33%, and the Nasdaq declined 0.12%. American indexes opened Tuesday on a mixed trend as investors awaited Friday's nonfarm payrolls data, which could intensify rate hike expectations if it shows continued labor market strength.

European markets traded lower as rising financing costs fueled selling pressure on real estate and technology sectors, with trading suspended in London due to a public holiday. France's CAC 40 fell 0.79%, Germany's DAX 40 dropped 1.17%, and Italy's FTSE MIB 30 slipped 0.01% on Monday, extending the regional downtrend that has persisted since bond yields began climbing last week.

Asian equity markets came under heavy selling due to the deteriorating risk environment, though South Korea's exports surged 68.7% on an annual basis in August, above estimates, showing that global demand for technology products remains robust. Near Tuesday's close, South Korea's Kospi fell 0.1%, Japan's Nikkei dropped 0.1%, and Hong Kong's Hang Seng was down 1%, while China's Shanghai Composite traded flat despite data showing the manufacturing PMI rose to 51.5 in August.