U.S. Strikes on Iran Send Asian Stocks Lower; Oil Rises

Asian share markets fell after U.S. forces carried out strikes on an Iranian drone operation and reports surfaced of missile attacks linked to Kuwait. The developments came amid continued disruption to shipping through the Strait of Hormuz and a rebound in oil prices.

Japan’s Nikkei fell 1.4% and South Korea’s main index dropped 3.2%. MSCI’s index of Asia-Pacific shares outside Japan declined 2.1%. Futures pointed to weaker trading in Europe and the United States, with EUROSTOXX 50 futures down about 1.2%, S&P 500 futures off roughly 0.3% and Nasdaq futures down about 0.8%.

Brent crude rose 3.6% to $97.71 a barrel and U.S. crude gained 3.8% to $92.05 as shipping through the Strait of Hormuz remained heavily disrupted. The rise in fuel costs pushed inflation expectations higher and affected markets tied to interest-rate moves.

Yields on 10-year U.S. Treasury notes picked up four basis points to 4.526%. The stronger-yield environment weighed on high-multiple technology names and supported the dollar, which traded near 99.506 on the dollar index. The dollar reached a four-week high against the yen at 159.65, close to the 160 level that has previously prompted intervention by Japanese authorities. The euro slipped to $1.1590.

Market attention turned to U.S. personal consumption expenditures data due later in the week. Headline PCE inflation is expected to rise to about 3.8% year-on-year, a three-year high driven in part by higher fuel costs. Core PCE is forecast to increase 0.3% month-on-month, lifting the annual core rate to around 3.3%, above the Federal Reserve’s 2% target. Markets priced roughly a 50% chance of a quarter-point rise in the federal funds rate to a 3.75%–4.0% range by year-end.

Analysts at National Australia Bank wrote that with inflation well above target but the growth impact of the conflict still uncertain, the Federal Reserve faces two-sided risks.

In policy developments, Japan plans to issue bridging bonds to help finance programs aimed at boosting investment and economic security. European Central Bank Chief Economist Philip Lane noted policymakers are focused on preventing higher energy prices from feeding into broader inflation expectations.

Precautionary buying of traditional safe havens was limited. Reported gold prices fell to $4,374 an ounce despite the geopolitical flare-up, suggesting muted demand for the metal in the current environment.

Investors will monitor the incoming U.S. inflation data and any further developments in the Gulf that could affect oil flows and global markets.