Global equities had been climbing and nearly hit all-time highs on Thursday (Oct 8), but the rally faded as renewed tensions in the Middle East sent crude oil jumping. Inflation fears flared up again, and US Treasury bonds fell.

The MSCI All Country World Index, an important gauge for global stocks, dropped 0.2%, pulling further away from its record peak. Earlier this week, the index stood only about 1.5% below its all-time high. Major Wall Street benchmarks declined on Wednesday, a day after closing at record highs; ASIan equities followed suit and fell roughly 1% overall. #ASIaMarketLive#

Global benchmark Brent crude rose 2% and broke above $102 per barrel. Higher oil prices weighed on US Treasuries, pushing the benchmark 10-year Treasury yield up by 2 bASIs points to 5.31%, edging closer to levels unseen since 2002.

Mark Cranfield, strategist at Bloomberg MLive, commented: “ASIan sentiment is deteriorating as Brent crude futures move above $102 a barrel, which is further dragging down US Treasury futures. If this move negatively impacts French bonds, markets could turn quite chaotic once European traders fully join the session.”

Middle East Tensions Escalate Again

Oil prices advanced after reports that the White House had asked the Pentagon to draw up plans for military strikes against Iran, potentially to be carried out before US midterm elections. Meanwhile, a storm disrupted some US crude production. In addition, Iran-backed Houthi militants attacked two airports in Saudi Arabia, killing three people. The group intensified attacks on Saudi targets while fighting Saudi-backed forces in Yemen.

Rising oil prices have complicated the market outlook by adding inflationary pressure. The Federal Reserve raised interest rates last month with unanimous backing from all policymakers. Even with high rates and elevated oil prices, US stocks had largely ignored these headwinds and kept setting new records. Still, the earnings season kicking off next week will test a key question: whether billions of dollars poured into AI infrastructure can deliver matching investment returns.

David Russell of TradeStation said: “There may be one more rate hike this year because current policy is not particularly restrictive. Inflation remains above target, and most economic activity indicators stay strong, so price stability remains the Fed’s top policy priority.”

All 19 Fed Officials Unanimously Backed September Rate Hike

All 19 Federal Reserve officials supported a 25-bASIs-point increase in the benchmark policy rate at the September meeting, marking the first rate rise since July 2023. The move came as policymakers observed renewed signs of strength in the US economy.

In other markets, Samsung Electronics shares fell 1.3%. Although the firm posted record profits, results still came in below the average analyst estimates.

US Dollar Remains Strong

The US Dollar Index held onto gains from Wednesday, when it rose 0.3%. Sean Callow, Senior Analyst at ITC Markets in Sydney, stated: “Dollar bulls may need a fresh catalyst if they want to push the currency to retest the June high.”

Many of the 19 Fed officials backed the September rate increase as a safeguard against the risk of further inflationary pressure.

As geopolitical turmoil disrupts energy markets, shipping costs have also surged in tandem with oil prices. Rental rates for very large crude carriers hit new highs, substantially lifting costs across the entire oil supply chain.

French Fiscal Risks Become Europe’s New Focus

Meanwhile, EUR/USD stabilized, and traders kept a close eye on French fiscal pressures. These risks may force the European Central Bank into its fiercest clash with markets since the eurozone debt crisis. The French Treasury stated it will not alter its bond issuance strategy for now.

Sean Keane, ASIa-Pacific Chief Strategist at JB Drax Honore, said markets will keep pushing French bond spreads wider until an official response strong enough to reverse market trends emerges. He believes achieving this requires action not only from Brussels but also coordination from Berlin.

“France is now on everyone’s radar, and markets generally believe Europe faces a set of intractable problems paired with insufficient institutional will and collective capacity to tackle them,” Keane said.