Warsh's Hawkish Remarks Boost Rate Hike Bets, MSCI Asia Pacific Index Falls

The MSCI Asia Pacific Index fell 0.7%, while South Korea's KOSPI was down 0.1% after earlier dropping as much as 3.6%, with local brokers citing pension fund buying. Brent crude rose 2.5% to $90.25 a barrel. Gold fell to around $4,437 an ounce.

Traders are assessing the interest rate outlook after Federal Reserve Chair Kevin Warsh delivered hawkish inflation remarks at the Jackson Hole conference, while U.S. Treasury yields edged lower. A sharp escalation in Middle East tensions drove oil prices sharply higher, further complicating the inflation picture.

Speaking in Jackson Hole on Friday, Warsh said inflation has not shown a meaningful slowdown and that policymakers still have "work to do." According to swap data compiled by Bloomberg, market-implied odds of a Fed rate hike in September jumped to 60% from about 34% before Warsh's speech, and traders have priced in at least one more hike over the next year. Meanwhile, U.S. forces struck Iranian rocket launch sites on Sunday, and Iran retaliated, sending Brent crude up 2.5% on the day.

In Asian equities, the MSCI Asia Pacific Index fell 0.7%, while South Korea's KOSPI was down 0.1% after earlier dropping as much as 3.6%. Roy Lim, an equity sales trader at Samsung Securities, said pension funds were clearly buying KOSPI stocks in late trading, mainly concentrated in technology shares. Lim said pension funds net bought about 120 billion won of stocks in 20 minutes. European stock futures and Nasdaq 100 futures pointed to further declines. Gold fell to around $4,437 an ounce, and bitcoin slipped to around $77,500.

Hebe Chen, senior market analyst at Vantage Global Prime, said: "Asian markets opened the last trading day of the month in a cautious mood. Warsh's hawkish signal at Jackson Hole has put rate hike expectations firmly back on the table, and rate-sensitive tech sectors are particularly vulnerable. In the short term, the market's focus may shift more toward managing volatility rather than chasing gains."

South Korea's KOSPI fell more than 3% at one point, with Samsung Electronics and SK Hynix leading declines and weighing on the overall index.

The yen strengthened slightly to around 159.77 per dollar.

The two-year U.S. Treasury yield fell two basis points to 4.32%, partially recovering last week's losses.

Japan's 10-year yield rose 2 basis points to 2.940%.

Germany's two-year yield reached its highest level since July 2024 at 2.9014%.

Brent crude rose 2.5% to $90.25 a barrel, and WTI crude rose 2.2% to $85.23 a barrel.

Gold fell to around $4,437 an ounce.

Bitcoin slipped to around $77,500.

Rate Hike Bets Heat Up, Tech Valuations Under Pressure

Warsh's hawkish signal is the core driver of the current market turmoil. He said financial conditions are not currently restrictive and that interest rates remain the Fed's "primary tool" for achieving its policy goals, but he did not explicitly endorse a September hike.

His wording has divided market views on the timing of rate hikes. Bond investors from ABN AMRO Investment Solutions and Brandywine Global Investment Management have expressed skepticism about the rapid buildup of rate hike bets, arguing that Warsh may again hold rates steady—as he did at the June and July meetings. Market observers say this back-and-forth has eroded some of the Fed's policy credibility and contributed to pushing long-term Treasury yields to near two-decade highs.

Rising rate expectations have also directly hit this year's rally in artificial intelligence-related stocks. Tech shares are generally trading at high valuations and face significant adjustment pressure in a rising yield environment, with last week's concentrated sell-off in semiconductor stocks serving as a precursor.

In the Korean market, the KOSPI was down 0.1% after earlier dropping as much as 3.6%. Roy Lim, an equity sales trader at Samsung Securities, said pension funds were clearly buying KOSPI stocks in late trading, mainly concentrated in technology shares. Lim said pension funds net bought about 120 billion won of stocks in 20 minutes.

U.S.-Iran Tensions Reignite, Oil Surge Adds to Inflation Worries

Geopolitical risks escalated sharply at the start of the week. According to reports, U.S. forces struck Iranian rocket launch sites on Sunday, marking the first U.S. military action against Iran in more than a month. Iran's Islamic Revolutionary Guard Corps then launched missile and drone retaliatory attacks on a U.S. air base in Jordan early Monday.

Brent crude rose 2.5% to $90.25 a barrel in response, ending a relatively calm period of several weeks. Higher oil prices add extra pressure to already elevated inflation and further constrain the Fed's policy room.

Chris Weston, head of research at Pepperstone Group, wrote in a note: "For now, the latest developments do little to accelerate diplomatic negotiations, but traders are not showing obvious surprise, and the market continues to trade on headlines." The Trump administration had previously shifted to economic pressure tactics to force Iran back to the negotiating table, and this military action is seen as a phased move within that strategic framework.

Dollar Pulls Back from Highs, Yen Rebounds Slightly

In currency markets, the Bloomberg Dollar Index retreated during Asian trading, easing after Friday's biggest one-day gain in two months following the Jackson Hole speech. The yen strengthened slightly to around 159.77 per dollar, after falling to a one-month low on Friday amid the dollar's surge, with markets on alert for stronger verbal intervention signals from Japanese authorities.

In U.S. Treasuries, the two-year yield fell two basis points to 4.32% in Asian trading, partially recovering last week's losses, but the overall repricing of rate expectations continues to weigh on high-valuation risk assets.