Global Markets Plunge Amid Fed Hike Expectations and Middle East Tensions

Global markets began the week on a downward trend due to renewed expectations of another US interest rate hike by the Federal Reserve. The hawkish remarks made by Fed Chair Kevin Warsh at the Jackson Hole Economic Symposium reignited concerns over persistent inflation, with money markets increasing the probability of a rate hike in September to around 60%. The US two-year Treasury yield rose 12 basis points on August 28 and stabilized at 4.33% on Monday.

Warsh reiterated that additional policy measures may be necessary if inflation fails to ease towards the Fed's target, with Chicago Fed President Austan Goolsbee backing his assessment by describing inflation as the central issue facing policymakers. Meanwhile, US President Donald Trump announced a 'biggest oil deal in world history' with Venezuela, securing control over most of the country's oil reserves.

Escalating tensions in the Middle East further dampened risk appetite, with the US attacking Iran's Larak Island and causing civilian casualties. The military action fueled uncertainty after expectations that Washington would rely on additional economic sanctions rather than further strikes against Iran. Brent crude for December delivery surged 5.6% to as high as $90.95 a barrel.

The renewed weakness in the yen could increase the prospect of intervention by Japanese policymakers, while investors are now turning their attention to US nonfarm payroll data due this week for further clues on the direction of monetary policy.