Oil Spike Above $109 Lifts Bond Yields, Sinks Asian Stocks

Global bond yields climbed to fresh highs and equity markets fell on Friday as a sharp rally in crude oil revived inflation concerns and pushed investors to bet on further tightening by major central banks.

Brent crude futures touched a four-month peak of $109.97 a barrel after jumping 6% in the previous session. Oil shipments through the Strait of Hormuz remained constrained amid exchanges of attacks between the United States and Iran, while Iran-aligned Houthi forces took control of Yemen's port of Mocha, putting Saudi exports via the Red Sea at risk.

Analysts at RBC Capital Markets described the recent fighting between Houthi and Saudi-backed forces as the most serious violence in Yemen in years, warning that maritime traffic through the Bab el-Mandeb strait was severely threatened. The brokerage said Brent could reach $121.99 a barrel in the fourth quarter.

The oil move jolted markets that had only recently begun to price in the possibility of a prolonged war. Remarks by President Donald Trump that the conflict could extend beyond November's midterm elections added to the unease, and bond yields rose worldwide on inflation worries.

In the United States, the benchmark 10-year Treasury yield advanced overnight toward the closely watched 5% mark, the 30-year touched its highest level since 2007, and the two-year jumped 12 basis points. Markets now assign a 68% probability to a Federal Reserve rate increase this month.

Asian bonds sold off heavily. Australia's three-year government bond yield surged 17 basis points to a 15-year high of 5.037%, while Japan's 10-year yield rose 5.5 basis points to 2.965%.

JPMorgan analysts said they expect eight of the nine developed-market central banks they track to raise rates before the end of the year, including the Fed, the Bank of Japan, all four European central banks covered, Australia and New Zealand. Canada is seen holding steady. The analysts added that tightening is expected to stay modest for now, though risks tilt toward more action given resilient growth, sticky core inflation and commodity price pressures.

The jump in oil raised the stakes for U.S. consumer price data for August due later in the day, which could shape the case for a Fed move next week. Forecasts centre on a 0.2% monthly rise in core CPI, though risks lean toward a stronger reading after overnight producer price data showed persistent stickiness.

Higher yields lifted the discount rates applied to corporate valuations, leaving Asian equities lower. Australia's resources-heavy index slipped 1%, Japan's Nikkei tumbled 2.8% and South Korea's KOSPI dropped 2.7%. Nasdaq futures lost 0.2% while S&P 500 futures were roughly flat.

The dollar drew support from rising Treasury yields, having gained 0.4% overnight against major peers, and held steady at 99.06. In commodities, gold traded at $4,317 an ounce after falling nearly 2% overnight, drawing little safe-haven demand.