Oil jumps, Asian stocks fall as Warsh hints at rate hikes and US-Iran tension returns

Oil prices rose more than 2% on Monday after fresh military exchanges between the United States and Iran, while Asian stocks fell on growing expectations that Federal Reserve boss Kevin Warsh will raise US interest rates.

Warsh, speaking at the Jackson Hole symposium of central bankers and economists in Wyoming, gave traders few reasons to doubt his readiness to increase borrowing costs. Inflation is currently at 3.7%, nearly double the Fed's 2% target, and Warsh called the spike "concerning". He also said he would be "hard-pressed" to describe current financial conditions as "restrictive", a potential hint that rate hikes could be on the horizon.

Warsh's warning

Warsh refused to give explicit guidance, but his words were clear. "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do," he said. He stopped short of backing a hike, adding: "I stand here today committed to a discipline, not to a decision."

All three main Wall Street indexes fell on Friday. Yields on short-term US Treasury bonds jumped, the dollar rallied against its peers, and gold, which benefits from lower interest rates, dropped.

Asia followed suit on Monday. Tokyo, Seoul, Hong Kong, Shanghai, Taipei and Jakarta all closed lower, while Singapore and Wellington edged up. Tech firms led the decline, as companies relying on borrowing to fund huge AI investments came under pressure.

Oil spikes after US strike on Iran

Focus is now on data due over the next two weeks before the Fed decides. Jobs figures come this week, followed by the consumer price index (CPI) next week. Chris Weston at Pepperstone said an inline payrolls print would make the core CPI report the major decider for the market's view on the Fed. "The volatility priced around that outcome across rates, forex and equities could therefore be significant," he wrote.

The Fed's inflation fight has been complicated by the Iran war, which has kept oil prices high. After easing for most of last week, crude spiked again on Monday. The United States said it attacked Iranian rocket launchers on a small island in the Strait of Hormuz, its first strikes on the country in a month. Tehran retaliated by hitting US military targets in Jordan.

Both main crude contracts rose more than 2%. The exchange came shortly after the US-Iran war reached the six-month mark, at a time when hostilities had been subsiding. The Strait of Hormuz, through which a fifth of global crude and gas passes, is largely closed. US officials this month vowed the "economic asphyxiation" of Iran to force the waterway open.

Stephen Innes at Quintex Intel summed up the oil market's mood: "Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed." He added that physical flows through Hormuz had improved from their worst levels, which is why crude had started giving back some fear premium. "But the latest exchange shows how fragile that progress remains and how quickly the shipping story can be pushed back onto the trading desk."