Asian share markets opened the week under pressure as investors confronted a renewed combination of geopolitical risk, higher energy prices and tighter monetary-policy expectations. The MSCI broadest index of Asia-Pacific shares outside Japan fell 1.1%, while Japan’s Nikkei declined 1.0% and South Korea’s market dropped 3.2%.

Chinese blue-chip stocks also weakened, falling 0.5%, while U.S. and European equity futures pointed toward a softer start. The pressure reflects growing concerns that an extended disruption to global energy supplies could reinforce inflation and make it more difficult for central banks to ease financial conditions.

Middle East Supply Risks Push Oil Higher

Brent crude climbed approximately 2.5% to $107.18 a barrel after gaining nearly 9% last week. U.S. crude also rose 2.6% to $102.62. Renewed attacks involving Saudi Arabia and vessels in the Gulf have increased concerns about the security of regional energy infrastructure and shipping routes.

A planned meeting in Oman between Iran and Gulf Arab states, which was expected to address a potential arrangement for reopening the Strait of Hormuz, was postponed. The delay adds uncertainty to efforts to restore more normal shipping conditions through the critical energy corridor.

With both the Strait of Hormuz and Bab el-Mandeb facing security threats, prolonged supply disruptions could keep crude prices elevated. For global markets, that raises the risk of another wave of energy-driven inflation affecting transportation, manufacturing and consumer spending.

Fed Rate-Hike Expectations Strengthen

The latest U.S. inflation data have added another layer of pressure. Markets now assign an approximately 86% probability to a 25-basis-point Federal Reserve rate increase on Wednesday, which would be the first hike since mid-2023. Expectations for another increase in December have also gained traction.

JPMorgan chief U.S. economist Michael Feroli now expects two rate increases this year, arguing that the Federal Reserve may face a credibility challenge if policymakers fail to act after signaling concern about persistent inflation.

Whether the moves represent a limited policy adjustment or the beginning of a longer tightening cycle will depend heavily on incoming economic data. A sustained increase in energy prices could make the second scenario more plausible by keeping inflation elevated.

Higher Treasury Yields Test Equity Valuations

The bond market is already reflecting the changing outlook. The 10-year Treasury yield remained near 4.97%, following a sharp increase over recent weeks. Two-year yields climbed 26 basis points last week, while 10-year yields increased 19 basis points as the yield curve flattened.

Higher yields raise the required return investors demand from equities, potentially putting pressure on valuations, particularly for technology companies whose future earnings are more sensitive to changes in interest rates.

Goldman Sachs chief U.S. equity strategist Ben Snider, however, believes strong corporate earnings could provide support for stocks even as monetary policy tightens. Historical performance also suggests that while the S&P 500 has typically struggled during the initial months of a hiking cycle, equities have historically performed better over the subsequent year.

Japan Adds Another Rate-Hike Risk

Investors are also preparing for a potential Bank of Japan rate increase later in the week. Markets imply roughly a 76% probability that the BOJ will raise its policy rate by 25 basis points to 1.25% on Friday.

The central bank is also expected to maintain a relatively hawkish tone as policymakers attempt to prevent renewed weakness in the yen. The dollar was trading around 153.98 yen after falling approximately 4% over the previous two weeks from its July peak near 164.

Meanwhile, the euro declined to around $1.1565 and sterling eased to approximately $1.3505, while the Bank of England is expected to leave its policy rate unchanged at 3.75%.

Global Markets Enter a More Difficult Policy Environment

Gold also slipped approximately 0.4% to $4,329 an ounce as rising bond yields reduced the relative appeal of an asset that does not generate interest income.

The combination of higher oil prices and tighter monetary-policy expectations is creating a difficult environment for global risk assets. Investors must now weigh the potential benefits of resilient corporate earnings against higher financing costs and a growing risk that inflation remains stubbornly elevated.

The direction of oil prices will be particularly important in the days ahead. A meaningful improvement in Middle East shipping conditions could relieve inflationary pressure and support equities. However, continued attacks or prolonged disruption around key waterways could push energy prices higher, strengthen expectations for additional rate increases and place further pressure on bonds and equity valuations. For markets, the immediate focus is shifting toward whether this week’s central-bank decisions confirm a temporary policy recalibration or mark the beginning of a broader global tightening cycle.