Shares slip as escalating Middle East situation lifts oil

MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.3%

Shares slipped on Monday as the escalating war in the Middle East lifted oil ​prices and fanned fears of inflation, while a packed week of tech earnings will further test investor faith in the artificial intelligence trade.

Brent ‌crude jumped above $90 a barrel for the first time in more than a month as Iran and U.S. continued to strike each other. Just a handful of ships transited the Strait of Hormuz on Sunday.

The longer the strait remains closed and the war escalates, the greater the ​risk that oil prices will have to rise to around $150/barrel to bring demand down to match the hit to supply, said Shane Oliver, head of ​investment strategy at fund manager AMP. This is not our base case but it’s a high risk again.

Brent added 2.4% to $90.18 a barrel.

Markets took an added ‌blow on ⁠Friday when Chinese AI firm Moonshot said it had a new open-weight model, Kimi K3.

Nikkei was closed for a holiday, having shed 6.4% last week in a tech-led rout. MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.3%, while Chinese blue chips added 1.4%.

South Korea’s ​chip-heavy market shed a further 4.1%, after dipping nearly 9% last week in wild trade as retail investors were squeezed ​out of leveraged positions.

Elsewhere, the jump in fuel costs has revived worries about inflation even as U.S. consumer price data surprised on the downside last week, ​leading futures markets to price in 29 basis points of central bank rate hikes by year-end.

Our forecast is for a more gradual turn toward a Fed hike in ​2027, but the balance of risks is shifting in the direction of an earlier hike than expected, said Bruce Kasman, chief economist at JPMorgan, noting a recent hawkish tilt in Fed policy rhetoric.

Futures imply a 60% chance of a rate rise as early as September, pushing yields on 30-year Treasuries back above the psychological 5.0% barrier. This is a level that tends to attract ​funds away from equities and toward fixed income, while lifting the valuation bar for future corporate earnings.