Oil prices continue to surge, triggering inflation concerns; global stock markets under pressure, Korean stocks close down 2.6%, US Treasury yields rise

The rally in global stock markets has been interrupted. International oil prices surged over 2% as tensions in the Middle East escalated again, pushing up inflation expectations and quickly cooling investor optimism that had just brought global equities near historical highs, while US Treasury yields rose in tandem.

Brent crude rose about 2.5% on Thursday, breaking through the $102 per barrel mark; meanwhile, a new round of large-scale debt issuance plans by AI giants rattled market confidence. Impacted by this, the yield on 10-year US Treasuries climbed 3 basis points to 5.31%, approaching its highest level since 2002; the MSCI World Index fell 0.2%, further away from its previously near-record highs. Asian equity markets followed the decline on Wall Street on Wednesday, dropping 1.2% overall, with Japan's Nikkei 225 closing down 1.4%, and South Korea’s KOSPI plunging 2.6%.

Previously, markets generally bet that strong corporate earnings would offset the pressure from high interest rates, but the resurgence of both oil prices and inflation is putting this logic to a new test. After turning positive briefly in early trading, US stock index futures retreated by 0.1%, while European stocks are also expected to open lower.

• The Nikkei 225 Index closed down 1.4%, at 69,042.11 points. Japan's TOPIX closed down 1.5% at 4,091.46. Korea's KOSPI closed down 2.6% at 6,625.93.
• The yen fell 0.1% to 158.26 per US dollar
• The yield on 10-year US Treasuries rose 3 basis points to 5.31%
• The yield on 10-year Japanese government bonds fell 2.5 basis points to 3.080%
• Spot gold rose 0.4% to $4,126.06 per ounce
• Brent crude rose about 2.5% on Thursday, breaking through the $102 per barrel mark.
• WTI crude rose as much as 3.0% intraday, breaking through $91 per barrel, quoted at $91.02 per barrel.
• Bitcoin dropped 0.6% to $82,848.73

The immediate trigger for the jump in oil prices came from multiple geopolitical headlines. According to reports, the White House has asked the Pentagon to draft strike plans against Iran, possibly to be implemented before the midterm elections. Meanwhile, the Houthi movement attacked two airports in Saudi Arabia, killing three people. The group has been escalating its attacks on Saudi Arabia and continues to fight Saudi-backed forces in Yemen. Additionally, a storm interrupted part of the US's domestic oil production.

The surge in oil prices has simultaneously driven up shipping costs. Charter rates for VLCC supertankers have hit new highs, significantly increasing costs across the oil supply chain. Bloomberg strategist Mark Cranfield remarked that Brent futures breaking above $102 is worsening sentiment in Asian markets and spilling over into US Treasury futures. "If this negative shock transmits to French government bonds and once European traders are fully in the market, things could get quite chaotic."

The impact of high oil prices, combined with Federal Reserve policy pressures, has notably heightened market concerns about the inflation outlook. Last month, the Federal Reserve unanimously decided to raise the benchmark interest rate by 25 basis points—the first hike since July 2023—citing signs of economic reacceleration.

David Russell from TradeStation believes the probability of another rate hike this year is quite high. "The current policy stance is not very restrictive. With inflation above target and most economic activity indicators still strong, price stability is the Fed’s overriding mission."

Previously, US stocks climbed to record highs under the dual pressure of high interest rates and high oil prices, but the earnings season officially starting next week will bring a sterner test—the market will examine whether the hundreds of billions invested in AI infrastructure can be transformed into corresponding profit returns.

In Europe, France’s fiscal situation remains under pressure, putting the eurozone under the most severe sovereign debt market stress since the European debt crisis. The French finance ministry said it would not adjust its current bond issuance strategy, but this statement has failed to calm market concerns.

Sean Keane, Chief Strategist for Asia-Pacific at JB Drax Honore, said that until officials issue a strong enough response to turn things around, the market will keep pushing up the spread between French and German government bonds, which will require coordination from Berlin and Brussels. "France is now in everyone’s sights. Europe is widely believed to be facing a series of intractable problems, and both institutional will and collective response capacity appear inadequate."

Meanwhile, the euro steadied slightly against the US dollar, while the US dollar index extended Wednesday’s 0.3% gain, continuing to attract safe-haven flows.