By Gregor Stuart Hunter and Medha Singh
Sept 2 (Reuters) - World stocks fell on Wednesday as fresh U.S. airstrikes on Iran pushed oil prices to five-week highs, stoking inflation concerns and extending a global bond selloff.
The U.S. struck Iranian military targets near the Strait of Hormuz, while Tehran said it had targeted U.S. assets across the region, marking the most significant exchange of fire since July.
Fears of further disruption to energy supplies lifted oil prices, with Brent crude futures
last up 0.6% at $95.18 a barrel. [O/R]
Wall Street futures pointed to another weak start after hitting one-month lows in the prior session. The pan-European STOXX 600 fell 0.3%, after sharper losses in Asia. South Korea's KOSPI dropped almost 4%, while the Nikkei 225 was down 2.9%.
"The recent increase in energy prices has put additional upward pressure on bond yields, which had already been on the rise on the back of some fiscal concerns," said Kiran Ganesh, multi-asset strategist at UBS Global Wealth Management.
"Stocks had been quite resilient to the increase in yields but at some point the faster rate of increase does start to put some pressure on equity markets."
The yield on the benchmark U.S. 10-year Treasury bond rose to near a three-year high of 4.8182%, while the yield on the 10-year Japanese government bond held above 3% for a second straight session after hitting a three-decade high earlier this week.
The rise in borrowing costs across major economies deepened concerns about tighter monetary policy and deteriorating fiscal dynamics.
The U.S. dollar index, which measures the greenback against a basket of six currencies, was up 0.1% at 99.734, near its highest since August 17. It was also supported by rising bets for a U.S. interest rate hike.
Rising yields and escalating geopolitical tensions underpinned the U.S. dollar's safe haven appeal, while reducing demand for equities and other riskier investments.
"With the market already pricing quite a hawkish outlook for the Fed, we think there's much more scope for downward surprises for the dollar than there is for some of the other currencies," Ganesh said.
DATA-DEPENDENT
The escalation in the Middle East and the global bond selloff have given September a shaky start, adding to pressure on markets days after hawkish comments from Federal Reserve Chair Kevin Warsh prompted investors to increase bets on a U.S. interest rate hike.
Traders now assign a roughly two-in-three chance that the Fed will deliver a 25-basis-point rate increase this month, up from 37% a week ago, according to CME Group's FedWatch tool.
Ahead of the Fed's September 16 meeting, investors are looking to upcoming U.S. economic data for clues on whether the economy remains strong enough to justify monetary policy tightening. ADP private payrolls data is due on Wednesday, the nonfarm payrolls report on Friday and the consumer inflation report on September 11.
Elsewhere, policy meetings from the European Central Bank and the Bank of Japan will also be closely watched as markets gauge how far major central banks are prepared to tighten policy in response to persistent inflation risks.
"September looks set to test just how far central banks are willing to go to keep inflation risks in check," said Matthew Ryan, head of market strategy at financial services firm Ebury.
Gold was down 0.1% at $4,322.24 an ounce, while bitcoin edged 0.6% lower to $76,951.01 and ether was off 1% at $2,394.57.
(Reporting by Gregor Stuart Hunter in Singapore and Medha Singh in Bengaluru. Editing by Tom Hogue, Mark Potter and Gareth Jones)
