Oil prices jumped, US bond yields rallied and equities retreated on Tuesday as the US Federal Reserve looked set to raise interest rates, with high inflation and AI concerns dominating market sentiment.

Brent crude futures again pushed towards US$110 a barrel, while average diesel prices in the United States struck a record high of just under US$6.27 a gallon, heaping pressure on US President Donald Trump ahead of mid-term congressional elections.

"There's no let-up in the volatility rippling through financial markets, with energy prices staying painfully elevated and worries swirling about the knock-on effect for inflation and interest rates," said Susannah Streeter, chief investment strategist at Wealth Club.

The yield on the 10-year US Treasury note hit 5.03 percent, a level last seen in 2007 before the global financial crisis, as investors price in a likely hike in US interest rates.

The US Federal Reserve began a rate-setting meeting on Tuesday with markets expecting policymakers to pull the trigger on a hike to tackle persistently high consumer prices in the world's biggest economy.

Market expectations for a 25-basis-point rate increase have risen sharply after official data published last week showed US annual inflation remaining far above the Fed's target.

With the crisis in the Middle East showing little sign of abating and Yemen's Houthi rebels taking control of a crucial outlet for shipping, crude has spiked this month to more than US$100 a barrel.

The surge in energy costs has ramped up pressure on central banks to raise borrowing costs.

The European Central Bank last week lifted interest rates in the eurozone.

The Bank of England is forecast to maintain its benchmark rate on Thursday as the UK economy struggles for growth.

All three major US stock indexes extended Monday's losses as broad risk-off sentiment weighed on nearly every sector but energy. That sector benefited from expanding hostilities in the Middle East, which included new attacks on Saudi Arabia's energy infrastructure.

"Given rising prices for fuel, especially diesel, given the near-certain outlook for rising rates beginning tomorrow, and given the concerns over the potential slowdown in the AI ecosphere, why step into the market aggressively until some of this clears up?" said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

If Fed policymakers vote to hike on Wednesday, it will be the first time the Fed has raised rates since 2023, when the central bank was still battling post-pandemic inflation.

Such a move will be sure to anger Trump, who has launched an unprecedented campaign to pressure the independent central bank to lower rates in order to spur economic activity.

The S&P 500 fell 0.5 percent, to 7,585, the Dow fell 0.6 percent, to 52,093, while the Nasdaq fell 0.8 percent, to 25,981. (Agencies)



Edited by Cecil Wong