By Rae Wee
SINGAPORE (Reuters) – Asian shares fell and gold prices rose on Monday as risk sentiment took a hit after Iran’s retaliatory attack on Israel stoked fears of a wider regional conflict and kept traders on edge.
The dollar rose to a new 34-year high against the yen on growing expectations that persistent inflationary pressures in the United States will keep interest rates high for longer.
The markets in Asia started the week cautiously. 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.
That was Iran’s first direct attack on Israeli territory.
The threat of open war between the Middle East’s greatest enemies and the encroachment of the United States has kept the region on edge. US President Joe Biden warned Prime Minister Benjamin Netanyahu that the US will not participate in a counter-offensive against Iran.
Israel said that “the campaign is not over yet.”
Japan’s Nikkei fell more than 1%, while Australia’s S&P/ASX 200 index lost 0.6%.
Hong Kong’s Hang Seng index fell 0.8%.
The escalating tensions also led to a flight to safety, sending gold up 0.51% to $2,356.39 an ounce and the safe-haven dollar moving broadly higher, extending its 1.6% gain from last week . [GOL/]
However, oil prices showed little reaction to the news as traders largely priced in a retaliatory attack from Iran that would likely further disrupt supply chains. As a result, Brent crude futures peaked last week at $92.18 per barrel, the highest level since October.
Brent was last down 0.5% at $90.01 a barrel, while U.S. West Texas Intermediate crude futures were down about 0.6% at $85.13 a barrel. [O/R]
“The key risks to the global economy are whether this escalates into a wider regional conflict, and what the response is in energy markets,” said Neil Shearing, 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 feed through to core inflation.”
US stock futures, meanwhile, traded higher after a heavy sell-off on Wall Street on Friday as results from major US banks failed to impress. [.N]
S&P 500 futures and Nasdaq futures rose 0.15% each.
“There will be plenty of geopolitical headlines,” said Chris Weston, head of research at Pepperstone.
“The market is really trying to understand what’s going on. Their visibility on price risk in this market has become a little bit trickier, and I think if you don’t have that visibility, you get higher volatility. That’s kind of where we are.”
RETHINK THE RATE
Elsewhere, U.S. Treasury yields held near their recent highs as traders lowered their expectations for the pace and size of Federal Reserve rate cuts this year. [US/]
The benchmark 10-year rate was last at 4.5277%, while the two-year rate remained around 5% and stood at 4.8966%.
A continued run of resilient US economic data, especially last week’s warmer-than-expected inflation report, has contributed to the view that US yields could stay higher for longer, and that the Fed is unlikely to start an easing cycle in June.
Futures now point to an easing of about 50 basis points expected this year, a huge decline from the 160 basis points priced in at the start of the year.
That massive change in the interest rate outlook has in turn put the dollar on a tear, pushing it to a 34-year high of 153.69 yen on Monday.
The euro and sterling similarly remained stuck near five-month lows. [FRX/]
“We have updated our forecasts for the US FOMC, moving the timing of the start of the rate cutting cycle to September 2024, compared to the previous July,” said Kristina Clifton, a senior economist at the Commonwealth Bank of Australia.
‘The US CPI has been stronger than expected in the first three months of 2024. We expect that a range of inflation pressures of 0.2%/month or lower will be needed to give the Fed confidence that inflation can remain sustainably lower and that interest rates can remain sustainably lower. do not have to remain at a restrictive level.”
A slew of Fed policymakers will speak this week, including Chairman Jerome Powell, who could provide more clarity on the future path of U.S. interest rates.
The shift in interest rate expectations has stalled bitcoin’s blistering rally after the world’s largest cryptocurrency repeatedly set new records this year on flows into new spot bitcoin exchange-traded funds and expectations of impending Fed cuts .
Bitcoin was last down more than 2% at $65,536 after falling below $62,000 on Sunday. [FTX]
(Reporting by Rae Wee in Singapore; Editing by Lincoln Feast and Jamie Freed)