Asia stocks extend global rout as Iran war drags on
Asian stocks suffered a global rout on Friday and Wall Street was followed by declines as the threat of a prolonged energy shock in the war-torn Middle East sent borrowing costs soaring.
Investors took some relief from US President Donald Trump’s decision to extend his ultimatum to strike Iranian power plants by 10 days, after postponing the initial 48-hour period by five days. Brent crude futures fell 1.0 per cent to US$107.07 ($A154.62) per barrel, having risen around 6.0 per cent overnight.
But the move in oil prices was small and reports that Trump was considering sending more troops raised concerns that the war would escalate into a land conflict, and there was no certainty that the Strait of Hormuz could reopen to shipping any time soon.
Iran rejected the US offer to end the conflict as “one-sided and unfair”.
Wall Street futures rose 0.2 percent in Asia. The Nasdaq Composite index fell 2.4 percent overnight, dropping almost 11 percent from its record close on Oct. 29 and confirming it has been in a correction since then.
“Middle East headlines won’t let up over the weekend, so the currency’s weight is leaning towards risk-off assumption for another week ahead as the US continues to add military resources to the region,” said Sean Callow, senior FX analyst at ITC Markets.
“Many believe the Iranian regime has the upper hand and doubt that productive negotiations with the United States are actually ongoing… The pressure on higher oil prices, the US dollar and yields, as well as weaker equities, appear solid.”
On Friday, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.4 percent and is expected to post a weekly decline of 3.0 percent. Japan’s Nikkei index finished the week with a loss of 1.3 percent and 0.9 percent.
In South Korea, the KOSPI fell 3.0 percent, bringing its weekly loss to a staggering 8.5 percent. Chinese blue chips fell 1.0 percent, while Hong Kong’s Hang Seng index fell 0.4 percent.
Citi analysts said more severe scenarios regarding conflict in the Middle East could push global growth below 2.0 percent this year, push headline inflation above 4.0 percent and increase the risk of recession.
“Asia, particularly Korea, Japan and India, faces the most intense headwinds due to over-reliance on imported fuel and direct exposure to disruptions in the Strait of Hormuz,” he said in a client note.
Norway’s Norges Bank has become the latest central bank to flag inflation risk and interest rate hikes as the war continues. The bank, which kept policy steady on Thursday, said it expects to raise interest rates this year; This is in stark contrast to its earlier forecast of three rate cuts by the end of 2028.
Global bond yields rose again after the rise in oil prices raised inflation concerns. While Japan’s 10-year yield increased by 4 basis points to 2.31 percent, Australia’s 10-year benchmark yield increased by 7 basis points to 5.076 percent.
The two-year U.S. Treasury yield was steady at 3.9714 percent on Friday; It rose 10 basis points overnight as traders priced in the increased risk of a U.S. Federal Reserve rate hike this year, which had priced in around 50 percent.
Among currencies, the US dollar took on the sheen of a safe haven, having been on the rise for three sessions. The risk-sensitive Australian dollar took the brunt of the market sell-off, falling 0.2 per cent to a two-month low of US$0.6872 ($A0.9924) following a 0.8 per cent drop overnight.
The euro stood at US$1.1533 ($A1.6655) after falling 0.3 per cent overnight, while the yen stood at 159.70 per dollar. Market observers expect intervention if the yen hits 160.
Gold rose 0.6 per cent to US$4,405 ($A6,361) an ounce, following a decline of around 3.0 per cent overnight.
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