US-Iran Tensions Spark Asian Market Selloff as Rate Hike Odds Rise

Asian share markets slipped on Monday as fresh tensions between the United States and Iran pushed oil prices higher. The Brent futures index rose 1.4% to $89.38 a barrel after US forces struck two of Iran's launchers on its Larak island, leading to Iranian retaliation against US forces in Jordan.

The resulting risk to inflation kept bond markets on edge, with investors narrowing the odds of a September rate hike by the Federal Reserve. The probability of a hike rose to 57%, causing short-term Treasury yields to jump sharply and flatten the yield curve.

Despite expectations that a rate increase will not come until December, analysts believe the outcome of Friday's August payrolls report and consumer price data due on September 11 will be crucial in determining whether rates rise earlier than expected. The Bank of Canada is seen holding off from hiking rates due to concerns about a trade war with the US.

The high yields combined with geopolitical stress pushed Japan's Nikkei down 2.1%, while South Korean stocks fell 2.4%. The MSCI index of Asia-Pacific shares outside Japan lost 0.7%.