Asian shares decline as oil prices rise, Fed rate hikes anticipated

Stock markets in Asia slipped into negative territory as traders grappled with the prospect of higher interest rates and elevated oil prices. The weakness reflected broader concerns about inflation pressures and central bank responses globally, with the US inflation picture taking centre stage in market calculations.

Market participants have now priced in an 86% probability that the US Federal Reserve will raise rates by 25 basis points at its meeting on Wednesday. This aggressive pricing reflects the surprisingly strong inflation readings from the world's largest economy, which have rekindled expectations of sustained monetary tightening.

Beyond the immediate rate decision, traders are also assigning significant odds to another rate hike by December, suggesting the Fed may maintain its hawkish stance through the end of the year. The succession of anticipated rate rises has weighed on investor sentiment, particularly in equity markets where higher borrowing costs typically pressure valuations.

Crude oil prices meanwhile extended their gains, adding to stagflation concerns among investors and lifting energy stocks even as broader indices retreated. The confluence of higher oil costs and tighter monetary policy has created a challenging environment for Asian equity markets, which remain sensitive to both energy prices and international financing conditions.