Asian stocks slip, oil gains as Middle East peace doubts fuel rate hike fears

Most Asian stock markets saw declines on Monday, influenced by renewed doubts surrounding the Middle East peace process. This uncertainty propelled oil prices and bond yields upward, prompting investors to anticipate a greater likelihood of increased U.S. interest rates.

In the UK, the pound weakened following reports that Prime Minister Keir Starmer was contemplating his political future. This came after rival Andy Burnham secured a decisive parliamentary election victory, leading to increased calls within the governing Labour Party for Starmer's resignation. U.S. President Donald Trump amplified these reports, stating Starmer was set to resign.

Meanwhile, U.S. Vice President JD Vance met with Iranian officials for initial talks under an interim peace deal. However, these discussions were overshadowed by Iran's announcement of a renewed closure of the Strait of Hormuz. Tracking data indicated a reduction in vessel transits through the strait, following 32 ships on Friday and 26 on Saturday. The threats from Iran were sufficient to drive Brent crude futures up by 1.1% to $81.43 a barrel and U.S. crude up by 2.7% to $78.70 a barrel.

U.S. equity futures also eased, with the S&P 500 futures down 0.5% and Nasdaq futures losing 0.7%. European markets mirrored this trend, with EUROSTOXX 50 futures falling 0.5%, DAX futures dropping 0.3%, and FTSE futures dipping 0.1%. Japan's Nikkei bucked the trend, edging up 0.7% after a significant rally the previous week. South Korea's market, however, fell 0.9% after a strong performance.

Treasuries remained under pressure after the Federal Reserve's recent hawkish stance. Markets now price in a 75% chance of a rate hike as early as September. "Our baseline call is for patience and a first hike in the second half of 2027, but believe the margin for error and the tolerance for further inflation is limited, with genuine risks of earlier hikes," said Fabio Bassi, head of cross-asset strategy at JPMorgan. Core inflation data due Thursday is forecast to rise, further underlining the risk of tighter monetary policy.

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Our baseline call is for patience and a first hike in the second half of 2027, but believe the margin for error and the tolerance for further inflation is limited, with genuine risks of earlier hikes.