Asia stocks experienced a decline on Friday, heading towards their sharpest weekly drop in six years, while oil prices were set for their largest increase in three years. This turbulent week for global markets was marked by the ongoing conflict in the Middle East, which showed little sign of abating.
Investors gravitated towards the safety of cash, coming to terms with the possibility that the U.S.-Israel conflict with Iran might extend longer than initially anticipated. Additionally, there was a shift towards more hawkish rate expectations from major central banks, driven by concerns that a sustained spike in energy prices could lead to a resurgence in inflation.
This week, yields on U.S. Treasuries increased by approximately 18 basis points, marking their largest rise in nearly a year, while the dollar was poised for its biggest 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,” stated 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 conflict has primarily impacted oil prices, with Brent crude futures trading around $83 per barrel, a significant increase from approximately $69 just a week earlier. U.S. crude surged to a 20-month high earlier this week.
“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,” noted Klay Group’s senior investment team.
High-Flying Stocks Tumble
MSCI’s broadest index of Asia-Pacific shares outside Japan last traded 0.4% lower and was set to fall by 6.6% for the week, marking its steepest weekly decline since March 2020. Japan’s Nikkei was down 0.5% and on track for a 6.5% weekly loss, while South Korea’s Kospi was headed for its largest weekly fall in six years with a 10.5% slide.
This week’s market downturn affected even high-flying technology stocks and indexes such as the Kospi, as investors rushed to book profits to cover losses elsewhere.
“When the dollar rallies and U.S. yields rise, funding conditions are tightening, which will often exacerbate broader moves particularly if there’s leverage involved,” explained Ben Bennett, Head of Asia Investment Strategy at L&G Asset Management.
U.S. stock futures remained steady in Asia on Friday, while EUROSTOXX 50 futures rose 0.6% and DAX futures added 0.5%.
Dollar is King
The dollar emerged as one of the few winners this week during volatile sessions that dragged down stocks, bonds, and even safe-haven precious metals at times. The dollar’s rally paused on Friday, but it was still on track for a 1.4% weekly gain, supported by safe-haven demand and reduced U.S. rate-easing expectations.
The euro, vulnerable to a spike in energy prices, was set to fall 1.7% for the week, while the British pound was similarly headed for a 0.95% weekly drop. Investors are now pricing in about 40 basis points worth of easing from the Federal Reserve this year, down from 56 basis points a week ago, while the odds for a rate cut from the Bank of England this month have fallen to 23% from near certainty just last week.
The European Central Bank is expected to hike rates by year-end.
The shifting rate expectations have, in turn, pushed up global bond yields. In Asia on Friday, the yield on the benchmark 10-year U.S. Treasury was steady at 4.1421%, having risen about 18 basis points this week. The two-year yield jumped 20 basis points for the week.
Elsewhere, spot gold remained steady at $5,078.88 an ounce, though it was headed for a 3.7% weekly fall as rising yields and a stronger dollar overshadowed the yellow metal’s safe-haven appeal.
