Asian shares fell and gold prices were slightly up early on Monday as risk sentiment soured and fears of a wider regional conflict kept traders on edge following Iran's retaliatory attack on Israel over the weekend.
The dollar scaled a fresh 34-year high against the yen on growing expectations that sticky inflationary pressures in the United States 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 U.S. has left the region on tenterhooks. U.S. President Joe Biden warned Prime Minister Benjamin Netanyahu that the U.S. will not take part in a counter-offensive against Iran.
Israel said, "The campaign is not over yet."
A sense of nervousness swept over Asian markets on Monday amid the escalating geopolitical tensions, 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 an ounce at 5 a.m. GMT and kept the dollar firm. At around 8:45 a.m. GMT, the gold traded at 2,358.80 per ounce.
Oil prices
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 2.358,80 crude futures peaking at $92.18 a barrel last week, the highest level since October.
Brent was last 0.24% lower at $90.23 per barrel, while U.S. 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 the response 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."
U.S. stock futures ticked higher after a heavy selloff on Wall Street on Friday as results from major U.S. banks failed to impress.
S&P 500 futures and Nasdaq futures each rose about 0.4%.
EURO STOXX 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 program 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, U.S. 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 (Fed) this year.
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 U.S. economic data, particularly last week's hotter-than-expected inflation report, has added to the view that U.S. 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 worth easing expected this year, a huge pullback from the 160 bps 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 yen on Monday.
The euro and sterling were similarly pinned near five-month lows.
"We have updated our forecasts for the U.S. FOMC, pushing out 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 U.S. CPI has been stronger than expected over the first three months of 2024. We expect that a string of inflation prints of 0.2%/month or lower will 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 further clarify the future path of U.S. interest rates.
The shift in rate expectations has halted Bitcoin's blistering rally after the world's largest cryptocurrency repeatedly notched fresh records this year thanks to flows into new spot bitcoin exchange-traded funds (ETFs) and expectations of imminent Fed cuts.
Bitcoin fell over 3% to $65,010, partly weighed down by the global risk-off mood.