Asia stocks fell on Friday and were headed for their sharpest weekly drop in six years while oil prices were poised for their biggest jump in three in a turbulent week for global markets as the conflict in the Middle East showed few signs of easing.
Investors sought the safety of cash as they sobered up to the fact the US-Israel war on Iran could drag on longer than initially anticipated.
They also moved to price in more hawkish rate expectations from major central banks, spooked by the prospect of a resurgence in inflation if the spike in energy prices persists.
Yields on US Treasuries have shot up some 18 basis points this week, their most in nearly a year, while the dollar was set for its largest weekly gain in 16 months.
“The range of plausible outcomes (of the war) has expanded to include both the possibility of an exceptionally constructive resolution and a highly destructive one,” said Daleep Singh, chief global economist at PGIM Fixed Income.
“Markets are being asked to price a much fatter set of tails with very little reliable information about the likelihood of each, or the path in between.”
The war has thus far had the biggest impact on oil prices, with Brent crude futures now trading around $US83 ($A119) per barrel, having been as low as $US69 ($A99) just about a week ago. US crude shot up to a 20-month high earlier this week.
Both are set to clock a rise of more than 15 per cent for the week, their largest since February 2022.
“The most market-relevant risk lies in severe escalation or direct infrastructure damage across key Gulf producers, which would likely produce sustained upward pressure on oil, feed into higher headline inflation, tighten global liquidity, and materially raise recession risks,” said Klay Group’s senior investment team.
MSCI’s broadest index of Asia-Pacific shares outside Japan last traded 0.4 per cent lower and was set to fall 6.6 per cent for the week, which would mark its steepest weekly drop since March 2020.
Japan’s Nikkei was down 0.5 per cent and on track for a 6.5 per cent weekly loss, while South Korea’s Kospi was also headed for its largest weekly fall in six years with a 10.5 per cent slide.
The market rout this week sent even high-flying technology stocks and indexes such as the Kospi tumbling, as investors scrambled to book profits to cover losses elsewhere.
“When the dollar rallies and US yields rise, funding conditions are tightening, which will often exacerbate broader moves particularly if there’s leverage involved,” said Ben Bennett, head of Asia investment strategy at L&G Asset Management.
US stock futures were steady in Asia on Friday, while EUROSTOXX 50 futures rose 0.6 per cent and DAX futures added 0.5 per cent.
The dollar has emerged as one of few winners this week in volatile sessions that have dragged stocks, bonds and, at times, even safe-haven precious metals lower.
The rally in the dollar hit pause on Friday, but it was still on track for a 1.4 per cent weekly gain, bolstered by safe-haven demand and reduced US rate-easing expectations.
The euro, which remains vulnerable to a spike in energy prices, was set to fall 1.7 per cent for the week, while sterling was similarly headed for a 0.95 per cent weekly drop.
Investors are now pricing in about 40 basis points worth of easing from the Federal Reserve this year, down from 56 bps a week ago, while odds for a rate cut from the Bank of England this month have fallen to 23 per cent from a near certainty just last week.
The European Central Bank is seen hiking rates by year-end.
The shifting rate expectations have, in turn, pushed up global bond yields, and in Asia on Friday, the yield on the benchmark 10-year US Treasury was steady at 4.1421 per cent, having risen some 18 bps this week.
The two-year yield has jumped 20 bps for the week.
Elsewhere, spot gold was steady at $US5,078.88 ($A7,269.61) an ounce, though it was headed for a 3.7 per cent weekly fall as rising yields and a stronger dollar eclipsed the yellow metal’s safe-haven appeal.
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