Oil Above $100 Sends Shockwaves Through Chinese Markets

China and Hong Kong stocks took a hit as investors waited for US inflation data that could shape the Federal Reserve's next rate move. The tension in the Middle East kept oil prices above $100 a barrel, which raised concerns about sticky inflation and higher interest rates.

Mainland benchmarks were only modestly lower, with the Shanghai Composite and CSI 300 each slipping 0.4% by midday. However, Hong Kong's Hang Seng index took the bigger hit, down 1.3%, while the Hang Seng TECH Index fell 2.1%.

The widening gap between US and Chinese government bond yields has pushed global money towards dollar assets and away from riskier markets. This trend is expected to continue until the US consumer price index report is released, which will help determine the Fed's next move. The yield advantage of the 10-year US Treasury over China's 10-year hit a record, with OCBC Bank stating that the next Fed decision 'remains a close call'.

A survey showed US companies in China feeling more optimistic, but these signals were overshadowed by the global rates and oil story. The pressure is often felt first in rate-sensitive growth shares, where investors demand more potential upside to justify taking extra risk.