Asian stocks were under pressure, with South Korean stocks narrowing their losses to 0.3%, as escalating tensions in the Middle East caused oil prices to surge.

Asian stocks were under pressure, with South Korean stocks narrowing their losses to 0.3%, as escalating tensions in the Middle East caused oil prices to surge.

Global markets continued their decline following hawkish comments from Federal Reserve Chairman Warsh, with rising expectations of interest rate hikes weighing on stocks and gold, while escalating tensions in the Middle East pushed oil prices higher, further complicating the inflation outlook.

Warsh, speaking in Jackson Hole last Friday, said inflation has not yet shown substantial signs of slowing and policymakers still have "work to do." According to swap data compiled by Bloomberg, market bets on a September rate hike by the Federal Reserve jumped from about 34% before Warsh's speech to 60%, already pricing in at least one more rate hike over the next year. Meanwhile, the US military's airstrikes on Iranian rocket launch sites on Sunday prompted retaliatory strikes from Iran, causing Brent crude oil to surge 2.5% in a single day.

In Asian stock markets, the MSCI Asia Pacific index fell 0.7%, while the South Korean KOSPI index was down 0.1%, after previously falling as much as 3.6%. Roy Lim, a stock sales trader at Samsung Securities, said pension funds made significant purchases of KOSPI shares in the closing session, primarily in technology stocks. Lim stated that pension funds made net purchases of approximately 120 billion won in the last 20 minutes. European stock index futures and Nasdaq 100 futures both point to further declines. Gold fell to around $4,437 per ounce, and Bitcoin slipped to around $77,500.

Hebe Chen, senior market analyst at Vantage Global Prime, said, "Asian markets opened with a cautious wait-and-see attitude on the last trading day of the month. Warsh's hawkish signals at Jackson Hole have brought interest rate hike expectations back to the forefront, making the interest rate-sensitive technology sector particularly vulnerable. In the short term, the market focus may be more on managing volatility rather than chasing rallies."

The South Korean KOSPI index once fell by more than 3%, with Samsung Electronics and SK Hynix leading the decline and dragging down the overall performance.The yen strengthened slightly to around 159.77 against the US dollar.The yield on the two-year U.S. Treasury note fell two basis points to 4.32%, partially recovering the losses from last week.The yield on Japan's 10-year securities rose 2 basis points to 2.940%.The yield on German two-year government bonds reached its highest level since July 2024, at 2.9014%.Brent crude rose 2.5% to $90.25 a barrel, while WTI crude rose 2.2% to $85.23 a barrel.Gold fell to around $4,437 per ounce.Bitcoin fell to approximately $77,500.

As bets on interest rate hikes intensify, tech stock valuations come under pressure.

Warsh's hawkish remarks were the core driver of the current market turmoil. He stated that financial conditions are not currently restrictive and that interest rates remain the Fed's "primary tool" for achieving its policy goals, but he did not explicitly express support for a September rate hike.

This wording has led to divergence in market opinions regarding the timing of interest rate hikes. Bond investors from ABN AMRO Investment Solutions and Brandywine Global Investment Management have expressed skepticism about the rapidly accumulating rate hike bets in the market, believing that Warsh may once again hold back—as he did at the meetings in June and July. This inconsistency, in the view of market observers, has somewhat eroded the credibility of the Federal Reserve's policy and has, to some extent, pushed long-term Treasury yields to near two-decade highs.

The expectation of rising interest rates has also directly impacted the surge in artificial intelligence-related stocks this year. Technology stocks are generally in a high valuation range, facing significant downward pressure in an environment of rising yields; last week's concentrated sell-off in the semiconductor sector was a precursor to this.

In the South Korean market, the KOSPI index is currently down 0.1%, after having fallen as much as 3.6% earlier. Roy Lim, a stock sales trader at Samsung Securities, stated that pension funds made significant purchases of KOSPI shares in the closing session, primarily focusing on technology stocks. Lim said that pension funds made net purchases of approximately 120 billion won in the last 20 minutes.

Renewed tensions between the US and Iran and a surge in oil prices exacerbate inflationary risks.

Geopolitical risks escalated significantly at the start of the week. The US military reportedly struck Iranian rocket launch sites on Sunday, marking the first US military action against Iran in over a month. Iran's Islamic Revolutionary Guard Corps retaliated early Monday morning with missile and drone attacks on a US airbase in Jordan.

Brent crude oil rose 2.5% to $90.25 a barrel, ending several weeks of relatively calm trading. The rise in oil prices puts additional pressure on already high inflation and further restricts the Federal Reserve's policy space.

"At this point, the latest developments have done little to accelerate diplomatic negotiations, but traders have not shown any significant surprise, and the market is still trading in line with the headlines," wrote Chris Weston, head of research at Pepperstone Group, in a report. The Trump administration has previously shifted to using economic pressure to force Iran back to the negotiating table, and this military action is seen as a phase in that strategy.

The US dollar retreated from its highs, while the Japanese yen rebounded slightly.

In the currency markets, the Bloomberg Dollar Index retreated during Asian trading hours, paring its biggest one-day gain in two months following Friday's Jackson Hole speech. The yen strengthened slightly to around 159.77 against the dollar, after falling to a one-month low on Friday, driven by a strong dollar, as markets remained wary of potential stronger verbal intervention signals from Japanese authorities.

Regarding US Treasuries, the two-year yield fell two basis points to 4.32% during Asian trading, partially recovering last week's losses, but the overall logic of repricing interest rate expectations suppressing overvalued risk assets remains unchanged.

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