Asian stocks under pressure, Korean stocks narrow losses to 0.3%, Middle East tensions drive oil prices sharply higher

The global markets continued their decline under the impact of hawkish remarks by Federal Reserve Chair Walsh, as expectations for rate hikes surged, weighing on stocks and gold. At the same time, the rapidly escalating tensions in the Middle East pushed oil prices sharply higher, making the inflation outlook even more complicated.

Walsh, in his speech at Jackson Hole last Friday, said inflation has yet to show substantial easing, and that policymakers still have "work to do". According to swap data compiled by Bloomberg, market bets on a Fed rate hike in September jumped from around 34% before Walsh's speech to 60%, and have now priced in at least one more hike within the coming year. Meanwhile, the US military on Sunday carried out an airstrike on Iranian rocket launch sites, prompting retaliatory strikes from Iran, and Brent crude surged 2.5% in a single day.

In Asian equity markets, the MSCI Asia Pacific Stock Index fell 0.7%, while South Korea's KOSPI index was down 0.1%, after having dropped as much as 3.6% earlier. Roy Lim, an equity sales trader at Samsung Securities, noted that pension funds evidently bought KOSPI stocks toward the close, focusing mainly on tech stocks. Lim said pension funds were net buyers of around 120 billion won in equities within 20 minutes. Both European stock index futures and Nasdaq 100 futures point to further declines. Gold fell to around $4,437 per ounce, while bitcoin slid to roughly $77,500.

Hebe Chen, Senior Market Analyst at Vantage Global Prime, commented: "Asian markets opened with a cautious and watchful tone on the final trading day of the month. The hawkish signals from Walsh at Jackson Hole have put rate hike expectations back in focus, with tech stocks—particularly sensitive to interest rates—appearing most vulnerable. In the short term, the market’s priority may shift more toward managing volatility than chasing gains."

• The South Korean KOSPI index once fell more than 3%, with Samsung Electronics and SK Hynix leading the declines and dragging down overall performance.
• The yen strengthened slightly to about 159.77 per US dollar.
• The US 2-year Treasury yield eased by two basis points to 4.32%, recouping some of last week’s losses.
• Japan’s 10-year yield rose 2 basis points to 2.940%.
• Germany’s 2-year Treasury yield hit its highest since July 2024, at 2.9014%.
• Brent crude rose 2.5% to $90.25 a barrel, while WTI crude climbed 2.2% to $85.23.
• Gold fell to about $4,437 per ounce.
• Bitcoin dropped to around $77,500.

The hawkish signals from Walsh’s speech are the main driving force behind the current market turmoil. He stated that current financial conditions are not restrictive, and that interest rates remain the Fed’s "primary tool" for achieving policy objectives, though he stopped short of explicitly supporting a September rate hike.

His remarks led to divisions over the timing of hikes. Bond investors from ABN AMRO Investment Solutions and Brandywine Global Investment Management have expressed doubts about the rapid buildup in rate hike bets in the market, believing Walsh may choose to hold steady again, just as he did at the Fed’s June and July meetings. Observers note that this wavering has undermined the Fed’s policy credibility to some extent and contributed to longer-term Treasury yields rising to near two-decade highs.

Expectations for higher rates have also directly pressured the rally in AI-related stocks this year. Tech shares are generally highly valued, facing significant adjustment pressures in a rising yield environment, with last week’s selloff in the semiconductor sector serving as a warning sign.

In South Korea, the KOSPI index is down 0.1% after earlier falling as much as 3.6%. Roy Lim, an equity sales trader at Samsung Securities, noted that pension funds bought KOSPI equities heavily toward the close, mainly focusing on tech stocks. Lim stated that pension funds net bought around 120 billion won in shares within 20 minutes.

Geopolitical risk has significantly escalated at the start of this week. According to reports, the US military carried out strikes on Iranian rocket launch positions on Sunday – the first US military action against Iran in over a month. Iran’s Islamic Revolutionary Guard Corps responded at dawn on Monday by launching retaliatory missile and drone strikes at the US air base in Jordan.

Brent crude jumped 2.5% to $90.25 per barrel, ending a relatively calm stretch in recent weeks. Rising oil prices add further pressure to already elevated inflation and make monetary policy decisions more challenging for the Fed.

Chris Weston, Head of Research at Pepperstone Group, wrote in a report: "For now, the latest developments do little to advance diplomatic talks, but traders have shown little apparent surprise, with markets still trading on the headlines." The Trump administration had previously shifted to economic pressure tactics to force Iran back to the negotiating table, and this military action is seen as a phase within that strategic framework.

In the currency markets, the Bloomberg Dollar Index slipped during Asian trading, paring the largest one-day gain in two months seen after the Jackson Hole remarks last Friday. The yen slightly strengthened to about 159.77 to the dollar, after hitting a one-month low under Friday’s dollar strength, with markets remaining vigilant for stronger verbal intervention signals from Japanese authorities.

In US Treasury trading, the 2-year yield slipped two basis points to 4.32% during the Asian session, recouping part of last week’s decline, but the logic of re-pricing higher rates continues to weigh on high-valuation risk assets.