Global markets came under renewed pressure as escalating fighting between the US and Iran pushed energy prices higher, reigniting inflation concerns and strengthening expectations for tighter monetary policy. Stocks and bonds extended their declines, with investors increasingly focused on the risk that prolonged disruption to energy flows through the Persian Gulf could create another global inflation shock.

MSCI’s Asia Pacific Index fell around 2% to a one-week low, while the MSCI All Country World Index declined to its lowest level in almost a month. Rising energy costs and higher bond yields are creating a challenging environment for equities, particularly as investors reassess the potential impact of tighter monetary policy on economic growth and corporate valuations.

Brent crude rose 0.7% to around $95.32 a barrel, marking its fourth gain in five sessions. Diesel prices climbed to their highest level in more than four months, while European natural gas reached its highest level since 2023. The moves reflect growing concerns that the intensifying US-Iran conflict could disrupt energy transportation through the Persian Gulf and, in particular, the Strait of Hormuz.

The increase in energy prices has also intensified pressure across global bond markets. Global government bond yields reached their highest levels since 2008, while the US 10-year Treasury yield rose 1 basis point to 4.81%, its highest level since late 2023. Investors are increasingly concerned that higher energy prices could force central banks to maintain or even increase interest rates to prevent a renewed inflationary cycle.

Markets are now pricing more than a 50% probability of an interest-rate increase this month from four major central banks. The combination of persistent inflation, higher government spending and increased corporate borrowing associated with the AI infrastructure investment boom is adding to concerns that inflation could remain elevated for longer.

The geopolitical situation around the Persian Gulf remains the primary source of uncertainty. Iran’s Islamic Revolutionary Guard Corps said it had attacked US assets in Kuwait, Bahrain, Jordan and Iraq’s Erbil. Any further expansion of the conflict could increase the risk of prolonged disruption to energy and shipping flows across the Persian Gulf, potentially pushing crude prices significantly higher.

The key market question is whether rising oil prices and bond yields will begin to exert deeper pressure on risk assets. A sustained increase in energy costs could simultaneously weaken economic growth and reinforce inflation, creating a particularly difficult environment for central banks and investors.

In monetary policy, the Reserve Bank of New Zealand raised its key interest rate for a second consecutive meeting as policymakers sought to move toward less stimulatory settings and contain inflationary pressures.

Australia also delivered a stronger economic signal, with economic growth accelerating unexpectedly last quarter. The stronger performance, combined with persistent inflation, has strengthened expectations that the Reserve Bank of Australia could raise interest rates again.

In Japan, Bank of Japan Governor Kazuo Ueda said policymakers would take upside price risks into account when deciding monetary policy. The comments could further strengthen expectations for a potential interest-rate increase at a meeting later this month, particularly as Japanese inflation remains a key concern.

US long-term borrowing costs also remain under scrutiny. The 30-year Treasury yield climbed back toward levels seen before Treasury Secretary Scott Bessent expanded the government's bond buyback program, raising questions about how effective the initiative will be in containing long-term borrowing costs.

On the international policy front, Bessent said China prevented the Group of 20 from issuing a joint communique following a meeting of finance ministers and central bank officials, citing disagreements surrounding China’s large trade surplus. The development adds another layer of uncertainty to the global trade and economic outlook.

Overall, markets are facing a difficult combination of rising oil prices, elevated bond yields, tighter monetary-policy expectations and escalating Persian Gulf tensions. The risk of disruption to energy flows through the Persian Gulf is now becoming increasingly important for the global inflation outlook. If crude prices remain elevated, central banks may face renewed pressure to keep interest rates higher for longer, creating further challenges for equities and other risk assets.

FISG Daily Market Wrap provides a concise view of the forces moving global markets, helping investors stay informed and better prepared for what comes next.

FISG — Interstellar Group