Stocks set for tough week, oil eyes big gains

Asian shares fell on Friday and are poised for their biggest weekly decline in six years, while oil prices are set for their biggest rise in three years in a turbulent week for global markets as conflict in the Middle East shows signs of easing.

Investors sought the safety of cash as they woke up to the fact that the US-Israeli war against Iran would last longer than initially anticipated.

They have also turned to pricing in more hawkish rate expectations from major central banks, who fear the possibility of a resurgence in inflation if energy prices continue to rise.

U.S. Treasury yields rose nearly 18 basis points this week to their highest level in almost a year, while the dollar is poised for its biggest weekly gain in 16 months.

“The plausible consequences (of war) have expanded to include the possibility of both an extraordinarily constructive solution and an extremely destructive solution,” said Daleep Singh, chief global economist at PGIM Fixed Income.

“Markets are being asked to price a much thicker set of tails, with little reliable information about the probability of each or the path in between.”

The war has had the biggest impact on oil prices so far; Brent crude futures are currently trading around US$83 ($A119) per barrel; it was as low as US$69 ($A99) about a week ago. US crude oil rose to a 20-month high earlier this week.

Both are expected to rise more than 15 percent during the week, the largest increase since February 2022.

Klay Group’s senior investment team said: “The key risk to the market lies in significant upside or outright infrastructure damage among major producers in the Gulf, which is likely to put sustained upward pressure on oil, fueling higher inflation, tightening global liquidity and materially increasing recession risks.”

MSCI’s broadest index of Asia-Pacific shares outside Japan last traded 0.4 percent lower and was expected to fall 6.6 percent for the week; This would mark its steepest weekly decline since March 2020.

Japan’s Nikkei index was down 0.5 percent, on track for a weekly loss of 6.5 percent, while South Korea’s Kospi index was down 10.5 percent, heading for its biggest weekly decline in six years.

This week’s market defeat has even sent high-flying tech stocks and indexes like the ‌Kospi‌ falling as investors scramble to book profits to offset losses elsewhere.

“When the dollar rises and US yields rise, financing conditions tighten, which often exacerbates broader moves, especially when it comes to leverage,” said Ben Bennett, head of Asian investment strategy at L&G Asset Management.

US stock futures were steady in Asia on Friday, with EUROSTOXX 50 futures up 0.6 percent and DAX futures up 0.5 percent.

The dollar has been one of the few winners this week in volatile sessions that have dragged stocks, bonds and sometimes even safe-haven precious metals lower.

The dollar’s rise stalled on Friday but was on track for a 1.4 percent weekly gain, supported by safe-haven demand and fading U.S. interest rate cut expectations.

While the euro, which remains vulnerable to the increase in energy prices, is expected to decrease by 1.7 percent this week, the pound sterling is also heading for a similar weekly decrease of 0.95 percent.

Investors are now pricing in around 40 basis points of easing from the Federal Reserve this year; This rate was 56 basis points compared to a week ago. The likelihood of the Bank of England cutting interest rates this month has dropped from almost certain last week to 23 percent.

It appears that the European Central Bank will increase interest rates by the end of the year.

Changing rate expectations also boosted global bond yields, with the 10-year U.S. Treasury yield in Asia on Friday holding steady at 4.1421 percent, up about 18 basis points this week.

The two-year bond yield rose 20 basis points during the week.

Elsewhere, spot gold was steady at US$5,078.88 ($7,269.61) an ounce but headed for a 3.7 per cent weekly decline as rising yields and a stronger dollar eclipsed the yellow metal’s safe-haven appeal.