Asian equity markets started the week under pressure as oil prices climbed again amid uncertainty over whether the United States and Iran can reach a truce. President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz over the weekend while saying discussions would continue.

Brent crude futures jumped 2.7% to $107.16 a barrel, bringing the month’s advance to nearly 18%. U.S. crude futures gained 1.9% to $94.16. The renewed rise in energy prices is adding to concerns that inflation could become more persistent, particularly as limited refining capacity has pushed diesel prices to record levels above the underlying cost of crude.

Markets Price More Federal Reserve Tightening

Higher energy prices are reinforcing expectations that central banks may need to maintain or increase restrictive monetary policy. The Reserve Bank of Australia is expected to raise interest rates Tuesday, while markets were pricing approximately a 68% probability that the Federal Reserve will deliver a second consecutive rate hike in October.

Markets were also pricing roughly 90 basis points of additional tightening through late next year. That outlook has contributed to a sharp increase in Treasury yields, with the 30-year yield rising to 5.5173%, close to its highest level since 2004. The yield has climbed 27 basis points this month, while the two-year yield has risen 55 basis points.

Asian Equities Reflect the Rate Pressure

MSCI’s broadest index of Asia-Pacific shares excluding Japan declined 0.6%. South Korea’s stock market fell 2%, while Japan’s Nikkei was little changed. Chinese blue-chip shares dropped 1.9% to a one-year low as technology stocks came under pressure.

China’s market was also affected by weaker domestic demand. Industrial profit growth slowed further in August, with gains in technology unable to offset continued weakness in other parts of the economy. U.S. lawmakers also introduced legislation aimed at preventing the federal government from using Chinese-made components in sensitive systems that transmit data at AI data centers.

Strong Growth Provides a Counterweight

Despite the pressure from higher rates and energy costs, global economic activity remains relatively strong. The Atlanta Fed’s GDPNow model was forecasting annualized growth of 5.0% for the current quarter, while activity in Asia and Europe has also remained resilient, partly supported by the continuing investment boom in artificial intelligence.

JPMorgan chief economist Bruce Kasman described the global expansion as unusually broad-based, arguing that stronger growth and increased confidence in the economy’s ability to absorb high energy prices help explain why interest rates are rising while equities remain close to record levels.

Higher Yields Create a New Challenge for AI Investment

The rise in borrowing costs is particularly relevant for technology companies that are spending heavily on AI infrastructure and increasingly turning to debt markets to finance that expansion. Higher Treasury yields increase financing costs while also raising the discount rate applied to future corporate earnings.

Bank of America rate strategist Mark Cabana expects additional pressure on bonds as markets price higher Federal Funds rates for longer. He said the repricing could continue until financial conditions become sufficiently restrictive, creating another potential headwind for interest-sensitive assets.

Dollar Strengthens as Markets Await U.S. Data

The U.S. dollar has also benefited from stronger economic data and expectations for tighter monetary policy. The dollar index reached a two-month high of 101.39, while the euro slipped to $1.1383 after falling approximately 2% during September.

The dollar gained 0.3% against the yen to 157.75, recovering from Friday’s decline. Sterling remained near a three-month low at $1.3240 despite hawkish comments from Bank of England Governor Andrew Bailey. Gold, meanwhile, fell 2.2% to $4,192 an ounce as higher yields increased the opportunity cost of holding the non-interest-bearing asset.

What Investors May Watch Next

The week ahead will bring a series of U.S. inflation, GDP, manufacturing and employment reports that could influence expectations for Federal Reserve policy. The September payrolls report is forecast to show 85,000 new jobs, while unemployment is expected to remain at 4.1%, with some possibility of a decline to 4.0%.

For Asian markets, the combination of oil prices above $100, elevated Treasury yields and resilient economic growth creates a complicated backdrop. A sustained rise in energy prices could reinforce inflation pressures and prolong tighter monetary policy, while continued AI investment and strong economic activity could provide support for corporate earnings and risk assets.