US-Iran Tensions Drive Yields Higher and Stocks Lower as Oil Surges

US-Iran Military Clashes Spark Surge in Yields, Oil Prices and Stock Market Drop

Market Reactions to US-Iran Tensions and Economic Data

By Caroline Valetkevitch and Dhara Ranasinghe

Bond Yields and Stock Market Movements

NEW YORK/LONDON, Aug 31 (Reuters) – Bond yields rose and stocks fell on Monday as oil prices jumped with a resumption of military clashes between the U.S. and Iran adding to worries about inflation.

US-Iran Military Escalation

U.S. President Donald Trump was quoted on Monday as promising to “hit them hard” after Iran launched missiles overnight at two U.S. air bases in Jordan in response to a U.S. attack on Iran’s Larak Island.

Oil Price Surge

U.S. crude rose 2.54% to $85.51 a barrel and Brent climbed to $90.34 per barrel, up 2.54% on the day.

Interest Rate Expectations and Central Bank Actions

That kept alive the risk of further interest rate increases from major central banks. Federal Reserve Chairman Kevin Warsh’s speech at Jackson Hole on Friday boosted bets on a September Fed interest rate rise.

Federal Reserve and ECB Outlook

Fed funds futures traders are now pricing in 64% odds of a September rate hike, up from around 35% before Warsh’s comments on Friday. The European Central Bank is widely expected to hike rates when it meets on September 9 and 10.

Global Bond Yield Movements

Longer-dated U.S. Treasury yields were higher, with the yield on the benchmark U.S. 10-year Treasury note up 3.8 basis points at 4.764%, its highest since January 15, 2025. Earlier, Japan’s 2-year government bond yield rose to a 31-year high, while German and French 2-year bond yields also climbed.

Stock Market Performance

On Wall Street, the Dow Jones Industrial Average fell 356.59 points, or 0.67%, to 53,203.40, the S&P 500 fell 37.75 points, or 0.49%, to 7,674.22 and the Nasdaq Composite fell 103.71 points, or 0.39%, to 26,298.72.

Market Sentiment and Seasonal Trends

“It’s a market now that’s really beginning to feel the weight of climbing yields,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

In addition, he said, the market is about to enter September, “which is usually a rather tough month for stocks.”

Global Stock Indexes

The pan-European STOXX 600 was down 0.6% at 651.1 points on the day, with trading volumes subdued as London markets were closed for a bank holiday.

MSCI’s gauge of stocks across the globe fell 5.01 points, or 0.43%, to 1,148.15.

Upcoming Economic Data and Currency Movements

US Payrolls and Inflation Data

Friday’s U.S. August payrolls report and consumer price data due on September 11 will be key to determining whether the Fed moves as early as next month.

Payrolls Forecast

Economists expect payrolls to increase by 58,000 after July’s shock decline of 23,000, with unemployment holding at 4.1%. A significantly weaker outcome would likely be needed to materially reduce expectations of a September rate hike.

Dollar and Currency Markets

The dollar edged lower as traders awaited the jobs data.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.21% to 99.43, with the euro up 0.26% at $1.1614. Against the Japanese yen, the dollar weakened 0.21% to 159.71.

U.S. Treasury Secretary Scott Bessent said on Sunday that recent yen moves had been “pretty well contained” and that he expected Bank of Japan Governor Kazuo Ueda to “do the right thing” on monetary policy.

Global Economic Outlook

Inflation and interest rates are expected to dominate discussions when G20 finance ministers and central bankers meet in North Carolina on Monday and Tuesday.

Commodities Update

Spot gold fell 0.45% to $4,432.84 an ounce. 

(Reporting by Caroline Valetkevitch in New York and Dhara Ranasinghe in London; additional reporting by Wayne Cole Sydney; Editing by Mark Potter, Kevin Liffey and Cynthia Osterman)