Asian Stocks Fall as Iran War Fears Fuel Oil Prices & Inflation Concerns | Reuters

SINGAPORE—Asian stock markets are under pressure Friday, poised for a second consecutive weekly decline as escalating tensions surrounding the conflict in the Middle East continue to push oil prices higher and diminish expectations for interest rate cuts. The situation is creating a challenging environment for investors, who are bracing for prolonged volatility and potential further downside risk in the near term.

The U.S. Dollar has strengthened its position as a safe-haven asset amid the geopolitical uncertainty, putting downward pressure on most other currencies. The dollar is on track for a second weekly gain, having risen 2% since the end of February when the current wave of conflict began, according to market analysis.

Oil prices remain elevated, hovering near the $100 per barrel mark, despite a slight dip in early trading following a U.S. Decision to issue a 30-day license allowing countries to purchase Russian oil and petroleum products currently stranded at sea. CNN reports that this move is intended to ease some supply concerns, but the overall impact has been limited by broader geopolitical risks.

Brent crude futures were last trading at $99.85 a barrel, while West Texas Intermediate (WTI) crude was at $95.05 a barrel. These prices reflect ongoing concerns about potential disruptions to oil supply from the Middle East, a region critical to global energy markets.

Regional Market Performance

MSCI’s broadest index of Asia-Pacific shares eased 0.5% on Friday, putting it on course for a 1.5% decline for the week. Japan’s Nikkei 225 fell 1.3%, while South Korean stocks, heavily weighted towards technology, slid nearly 2%. Taiwan’s equity market as well experienced a decline, falling 1%.

The increasing risk of a prolonged conflict, particularly with Iran’s new Supreme Leader Mojtaba Khamenei vowing to close the Strait of Hormuz shipping lane, is fueling investor anxiety. The Strait of Hormuz is a vital chokepoint for global oil shipments, and any disruption could have significant consequences for energy prices and the global economy.

Inflation and Central Bank Policy

Rising oil prices are exacerbating concerns about inflation, leading markets to reassess expectations for central bank policy. Traders now anticipate only 20 basis points of easing from the Federal Reserve this year, compared to 50 basis points of cuts priced in last month. This shift in expectations reflects the growing belief that central banks will demand to maintain higher interest rates for longer to combat inflationary pressures.

“Markets were positioned for Fed cuts this year but the runway to justify Fed cuts is no longer there with the U.S. Excursion into Iran,” said Prashant Newnaha, senior rates strategist at TD Securities. “The markets are recalibrating for a higher terminal rate.”

The selloff in global stocks and bonds continues unabated. U.S. Stocks fell sharply overnight, and the yield on the two-year Treasury note, which is sensitive to expectations for Fed interest rate policy, reached a six-month high on Thursday.

Vasu Menon, managing director of investment strategy at OCBC in Singapore, cautioned that “with the possibility of higher oil prices still elevated, investors should be prepared for continued volatility and potentially further downside in the near term.”

Corporate Margins and Safe Havens

The negative impact of rising oil prices extends beyond inflation, affecting corporate margins and dampening optimism about potential Federal Reserve rate reductions. Here’s also weighing on traditional safe-haven assets like silver, gold, and government debt, according to Jose Torres, senior economist at Interactive Brokers.

The yield on the two-year Treasury note eased slightly to 3.730% after hitting its highest level since August 22 on Thursday, having gained 35 basis points in the two weeks since the conflict began. The yield on the 30-year bond has risen 24 basis points this month.

Central Bank Meetings on the Horizon

Investor attention is now turning to a series of policy meetings next week, including those of the Federal Reserve, the Bank of Japan, the European Central Bank, and the Bank of England. Most analysts expect these central banks to hold rates steady. However, the Reserve Bank of Australia is widely expected to hike rates next week.

Currency Movements

In currency markets, the euro last fetched $1.1527, a slight increase on the day but still on track for a weekly decline of nearly 1%. The dollar index was at 99.599, poised for a 0.8% rise for the week. The Japanese yen firmed slightly to 159.13 per dollar, hovering around the 160 mark, but intervention from Tokyo remains unlikely due to the oil price shock.

“What was once a ‘line in the sand’ at 160 has evolved into more of a moving goalpost,” said Tony Sycamore, market analyst at IG. “Against such a hostile macro backdrop, it makes little sense for authorities to waste precious intervention ammunition—whether verbal or physical, trying to defend the 160ish level this time around.”

Gold was 0.7% higher at $2,114 per ounce on Friday but is still set for a 1% drop for the week. The New York Times reports that despite its safe-haven status, gold has been impacted by the broader risk-off sentiment and expectations of continued high interest rates.

The current market environment is characterized by heightened uncertainty and volatility. Investors are closely monitoring geopolitical developments in the Middle East and assessing the potential impact on global economic growth and inflation. The coming weeks are likely to be crucial in determining the trajectory of financial markets.

Al Jazeera’s coverage of the situation highlights the complexities of the geopolitical landscape and the potential for further escalation.