ISTANBUL
Global markets traded mostly lower at the start of the week as Federal Reserve Chair Kevin Warsh’s hawkish remarks reinforced expectations of another US interest rate hike, while escalating tensions in the Middle East further dampened risk appetite.
Warsh signaled at the Jackson Hole Economic Symposium that additional policy measures may be needed if inflation fails to ease toward the Fed’s target. While describing the US labor market as consistent with full employment, he reiterated that the central bank’s focus should remain on prices.
Money markets raised the probability of a Fed rate hike in September to around 60%.
The US two-year Treasury yield rose 12 basis points on Aug. 28 before stabilizing at 4.33% on Monday.
The benchmark 10-year Treasury yield climbed five basis points to 4.73% before trading at around 4.71% at the start of the week.
Chicago Fed President Austan Goolsbee backed Warsh’s assessment, describing inflation as the central issue facing policymakers.
Meanwhile, US President Donald Trump said Washington had reached the “biggest oil deal in world history” with Venezuela, securing control over most of the country’s oil reserves, which he said exceed 65 billion barrels.
The US Treasury’s Financial Crimes Enforcement Network (FinCEN) also proposed cutting the Emirati branch of Egypt’s Banque Misr off from correspondent banking access to US financial institutions as part of its “Operation Economic Outcast” initiative targeting Iran.
Oil surges after US attack on Iran
Geopolitical tensions intensified after the US attacked Iran’s Larak Island, adding to selling pressure across global markets and sending oil prices sharply higher.
The military action further fueled uncertainty after expectations that Washington would rely on additional economic sanctions rather than further strikes against Iran.
US missile strikes on Larak Island resulted in civilian casualties, according to Iranian media.
Brent crude for December delivery surged 5.6% to as high as $90.95 a barrel.
Gold fell 3.2% to $4,455 per ounce on Aug. 28 following Warsh’s remarks at Jackson Hole and was down another 0.8% at $4,420 on Monday.
The US dollar index climbed to 99.7 on Aug. 28, its highest level since Aug. 14, before edging down 0.1% to 99.6 at the start of the week.
Investors are now turning their attention to US nonfarm payroll data due this week for further clues on the direction of monetary policy.
US, European markets
Wall Street closed lower at the end of last week after Warsh’s speech reinforced concerns over persistent inflation, while the University of Michigan’s consumer sentiment index was revised upward to 51.7 for August.
The Dow Jones Industrial Average slipped 0.02%, the S&P 500 fell 0.25% and the Nasdaq declined 0.52% on Aug. 28. US stock indexes also opened the new week lower.
European equities, meanwhile, were supported by strong corporate earnings at the end of last week, while attention is turning to the European Central Bank’s (ECB) upcoming monetary policy decision amid growing macroeconomic concerns.
The eurozone economic sentiment indicator rose 1.3 points month-on-month to 98.4 in August.
Minutes from the ECB’s latest meeting signaled the possibility of a rate hike next month, while Warsh’s hawkish comments and increased expectations of a Fed hike pushed the euro down 0.6% against the dollar to 1.1582 on Aug. 28. The euro recovered 0.1% to 1.1590 on Monday.
France’s CAC 40 gained 0.98%, Italy’s FTSE MIB rose 0.67%, Britain’s FTSE 100 added 0.29% and Germany’s DAX 40 climbed 0.77% to a record 26,618.74 points on Aug. 28.
European indexes began the new week mixed.
Asian markets under pressure
Asian equity markets also traded lower as investors assessed regional economic data and the impact of rising oil prices.
China’s manufacturing Purchasing Managers’ Index (PMI) increased to 49.8 in August from 49.2, but remained below the 50-point threshold separating expansion from contraction.
Japan’s manufacturing output rose 0.1% month-on-month and 4.1% year-on-year in July, coming in below estimates but accelerating from the previous month.
Japan’s 10-year government bond yield rose three basis points to 2.95% amid growing expectations that the Bank of Japan (BoJ) could raise interest rates and as oil prices climbed.
The dollar rose as high as 160.2 yen, its strongest level since July 31, before stabilizing around 159.8. Analysts said the renewed weakness in the yen could increase the prospect of intervention by Japanese policymakers.
At Friday’s close, Japan’s Nikkei 225 fell 0.9%, China’s Shanghai Composite declined 0.2%, Hong Kong’s Hang Seng lost 0.7% and South Korea’s Kospi dropped 1.2%.
