By Wayne Cole
SYDNEY, May 28 (Reuters) – Share markets slid in Asia on Thursday as news of a fresh U.S. military strike on Iran and Kuwaiti reports of missile attacks challenged optimism surrounding a peace deal, while U.S. inflation data loomed as a threat for bonds and interest rates.
Oil prices bounced nearly 4% and Treasury yields climbed as the hostilities added to conflicting signals over peace talks, after President Donald Trump dismissed an Iranian report of a deal to resume traffic through the Strait of Hormuz.
“Over the next two weeks, we expect either a deal for a new ceasefire, or the current ceasefire will have collapsed with active hostilities resuming,” said Madison Cartwright, a senior geo-economics analyst at CBA.
He put a 70% probability on a deal being agreed, while cautioning that the fate of the strait was up in the air.
“Insurance through the strait has become prohibitively expensive and it’s unclear how and at what price insurance will be made available,” he added. “It is also not clear if Iran will charge a toll, or a toll by another name.”
The U.S. military said it had carried out new strikes targeting an Iranian drone operation, while Tehran claimed it had attacked a U.S. air base in Kuwait.
With transits of the strait still only at a trickle, Brent crude rebounded 3.6% to $97.71 a barrel, while U.S. crude added 3.8% to $92.05. [O/R]
Yields on 10-year notes rose 4 basis points to 4.526% as the risk of oil staying high kept upward pressure on inflation expectations.
It also took a little steam out of the tech-driven bull run in stock markets, with Japan’s Nikkei losing 1.4%, while South Korean shares slid 3.2%. MSCI’s broadest index of Asia-Pacific shares excluding Japan fell 2.1%.
Reports from Japan suggested the government planned to issue “bridging bonds” to fund flagship programmes aimed at boosting investment in growth and economic security.
For Europe, EUROSTOXX 50 futures fell 1.2%, while FTSE futures shed 0.9% and DAX futures 1.0%. S&P 500 futures eased 0.3% and Nasdaq futures fell 0.8%.
INFLATION DATA TO TEST FED
Investor focus now shifts to U.S. data on personal consumption expenditures (PCE), which include the Federal Reserve’s preferred measures of inflation.
The inflationary pulse from fuel is expected to lift the headline PCE to a three-year high of 3.8%, while the core is forecast to rise 0.3% to an annual 3.3%, far above the Fed’s 2% target.
The pick-up has led more Fed board members to call for dropping its easing bias, or even preparing for a rate hike.
“With inflation well above target but the growth impact of the conflict still uncertain, the Fed faces genuine two-sided risk,” analysts at NAB wrote in a note.
“We see that uncertainty as the argument for holding rates through end-2027, whereas a firming in services core inflation would sharpen the case for higher-for-longer and a sharp moderation would shift attention to the emerging growth headwinds.”
Markets imply a 50-50 chance of a quarter-point rise in the funds rate to a range of 3.75% to 4.0% by year-end.
The shift in Fed expectations has helped underpin the U.S. dollar, which was trading at 99.506 against a basket of currencies, steady on the week.
The dollar crept to a four-week top on the yen at 159.65, nearing the 160.00 barrier that has triggered Japanese government intervention in the past.
The euro was 0.3% lower at $1.1590, though it has some support from expectations that the European Central Bank will hike interest rates when it meets in June.
Speaking on Thursday, ECB Chief Economist Philip Lane emphasised the importance of preventing the spike in energy costs from feeding into higher inflation expectations.
In commodity markets, gold slid 1.8% to $4,374 an ounce, having again seen scant support as a safe haven or as a hedge against inflation risks. [GOL/]
(Reporting by Wayne Cole; Editing by Jacqueline Wong, Shri Navaratnam and Thomas Derpinghaus)
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