Most Asian stock markets declined Monday as growing skepticism about the Middle East peace process drove oil prices and bond yields higher, prompting investors to factor in a greater likelihood of rising U.S. interest rates.
The British pound weakened following reports that Prime Minister Keir Starmer was reconsidering his political future. Those reports came after rival Andy Burnham won a decisive parliamentary election victory, which led more members of the ruling Labour Party to call for Starmer to step down.
U.S. President Donald Trump posted on social media that Starmer was preparing to resign, while also threatening new strikes against Iran. This came even as Vice President JD Vance sat down with Iranian officials for the first round of talks under a temporary peace agreement.
Those negotiations were complicated by Tehran’s announcement that it had once again shut down the Strait of Hormuz. Ship-tracking websites showed a drop in vessel traffic through the waterway, following 32 ships making the passage on Friday and 26 on Saturday.
Iran’s threats were enough to push Brent crude futures up 1.1% to $81.43 per barrel, though that figure remains well below the May peak of $126.41. U.S. crude climbed 2.7% to $78.70 per barrel, staying above the $67 level seen before the conflict began.
On Wall Street futures markets, S&P 500 contracts slipped 0.5% and Nasdaq futures fell 0.7%. In Europe, EUROSTOXX 50 futures dropped 0.5%, DAX futures were down 0.3%, and FTSE futures edged 0.1% lower.
Japan’s Nikkei index managed a modest 0.7% gain after surging nearly 8% the previous week to record highs. South Korea’s market, which had soared more than 11% last week on strong demand for semiconductor stocks, pulled back 0.9%. The MSCI index tracking Asia-Pacific shares outside Japan slipped 0.4%.
U.S. Treasury bonds remained under pressure following a more aggressive stance from the Federal Reserve last week, which led markets to assign a 75% probability to a rate increase as soon as September. Bond futures now reflect expectations of 38 basis points of tightening before year’s end, and yields on 2-year notes climbed 4 basis points to 4.2276% — the highest level since early 2025.
Fabio Bassi, head of cross-asset strategy at JPMorgan, offered his firm’s outlook: “Our baseline call is for patience and a first hike in the second half of 2027, but believe the margin for error and the tolerance for further inflation is limited, with genuine risks of earlier hikes.”
Bassi added: “We remain constructive on risk assets as improving labour markets will keep rates higher for longer, supporting a narrow leadership in Quality Growth, Large Cap and Tech. We see upside risks for the S&P target tilted towards 8,000.”
The Federal Reserve’s preferred measure of core inflation is set for release Thursday and is expected to tick up to 3.4% for May, reinforcing concerns about tighter monetary policy ahead. Scheduled Fed speakers this week include Governor Christopher Waller and Federal Reserve Bank of New York President John Williams.
The Fed’s more hawkish tone kept the U.S. dollar firm against the Japanese yen at 161.44, with only the threat of Japanese government intervention holding back a test of resistance at 161.96 — a level last seen in mid-2024. The euro dipped to $1.1462, recovering slightly from a three-month low of $1.1418 hit on Friday. Sterling fell 0.2% to $1.3210 amid the political uncertainty in Britain.
Skye Masters, head of market research at NAB, commented on the UK situation: “Amid the uncertainty around a potential challenge against the UK PM and what that means for the fiscal outlook, the likelihood is that gilts will remain under selling pressure to start the week.”
In commodity markets, gold slipped 0.1% to $4,154 an ounce, weighed down by higher bond yields that reduce the appeal of the non-interest-bearing metal.
