Asian shares lose ground as risk sentiment dims

Singapore — Asian shares fell and gold prices rose on Monday as risk sentiment took a hit after Iran’s retaliatory attack on Israel the stoked fear of a wider regional conflict and kept traders on edge.

The dollar scaled a fresh 34-year high against the yen on the growing expectation that sticky inflationary pressures in the US will keep rates there higher for longer.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7% after Iran launched explosive drones and missiles at Israel late on Saturday, in retaliation for a suspected Israeli attack on its consulate in Syria on April 1.

The threat of open warfare erupting between the arch Middle East foes and dragging in the US has left the region on tenterhooks. US President Joe Biden warned Prime Minister Benjamin Netanyahu that the US will not take part in a counteroffensive against Iran.

Israel said “the campaign is not over yet”.

A sense of nervousness swept over markets in Asia on Monday amid the escalating geopolitical tension, with Japan’s Nikkei sliding 1%, while Australia’s S&P/ASX 200 index lost nearly 0.5%.

Hong Kong’s Hang Seng index was down 0.63%.

The flight to safety sent gold up more than 0.5% to $2,356.39/oz and kept the dollar firm.

Oil prices, however, hardly reacted to the news, as traders had largely priced in a retaliatory attack from Iran that would likely further disrupt supply chains. That saw Brent crude futures peaking at $92.18 a barrel last week, the highest level since October.

Brent was last 0.24% lower at $90.23 a barrel, while US West Texas Intermediate crude futures fell 0.35% to $85.36 a barrel.

“The key risks for the global economy are whether this now escalates into a broader regional conflict, and what the response is in energy markets,” said Neil Shearing, group chief economist at Capital Economics.

“A rise in oil prices would complicate efforts to bring inflation back to target in advanced economies, but will only have a material impact on central bank decisions if higher energy prices bleed into core inflation.”

US stock futures ticked higher, after a heavy sell-off on Wall Street on Friday as results from major US banks failed to impress.

S&P 500 futures and Nasdaq futures each rose about 0.4%.

Eurostoxx 50 futures tacked on 0.22%, while FTSE futures slid 0.5%.

China, however, was an outlier, with stocks pushing higher after the country’s securities regulator issued draft rules on Friday to strengthen the supervision of company listings, delistings and computer-driven programme trading.

Market participants took the move as a positive signal to improve China’s ailing stock market and protect investors’ interests.

The country’s blue-chip CSI300 index rose nearly 2%, while the Shanghai Composite index gained 1.2%.

Rate rethink

Elsewhere, US treasury yields held near their recent highs as traders pared back their expectations of the pace and scale of rate cuts from the Federal Reserve in 2024.

The benchmark 10-year yield last stood at 4.5605%, while the two-year yield held near the 5% level and was last at 4.9269%.

A continued run of resilient US economic data, particularly last week’s hotter-than-expected inflation report, has added to the view that US rates could remain higher for longer, and that a Fed easing cycle is unlikely to commence in June.

Futures now point to about 44 basis points (bps) worth of easing expected in 2024, a huge pullback from the 160bps that was priced in at the start of the year.

That sea change in the rate outlook has in turn sent the dollar on a tear, pushing it to a 34-year peak of ¥153.85 on Monday.

The euro and sterling were similarly pinned near five-month lows.

“We have updated our forecasts for the US FOMC [Federal open market committee], pushing out the timing of the start of the interest rate cutting cycle to September 2024, from July previously,” said Kristina Clifton, a senior economist at Commonwealth Bank of Australia.

“The US CPI [consumer price index] has been stronger than expected over the first three months of 2024. We expect that it will take a string of inflation prints of 0.2%/month or lower to give the Fed confidence that inflation can stay sustainably lower and that interest rates do not need to remain at a restrictive level.”

A slew of Fed policymakers are due to speak this week, including chair Jerome Powell, who could give further clarity on the future path of US interest rates.

The shift in rate expectations has halted bitcoin’s blistering rally, after the world’s largest cryptocurrency repeatedly notched fresh records in 2024 thanks to flows into new spot bitcoin exchange traded funds and expectations of imminent Fed cuts.

Bitcoin fell more than 3% to $65,010, also weighed down in part by the global risk-off mood.

Reuters