Asian shares pulled back on Friday due to hawkish comments from some Federal Reserve officials and escalating geopolitical tensions, dampening risk sentiment. Brent futures remained above $90 a barrel due to concerns about supply disruptions amid prolonged conflict in the Middle East.
Israel braced for potential retaliation after its suspected killing of Iranian generals in Damascus, prompting Prime Minister Benjamin Netanyahu to assert that the country would retaliate against any threat. U.S. President Joe Biden, in a call with Netanyahu, warned of conditioning support for Israel’s offensive in Gaza on ensuring the protection of aid workers and civilians.
Rodrigo Catril, senior FX strategist at National Australia Bank, noted increased tension in the air, exacerbated by rising oil prices amid Israel-Iran tensions.
MSCI’s broadest index of Asia-Pacific shares outside Japan declined by 0.5%, reflecting a late downturn on Wall Street, with risk aversion dominating market sentiment. The index was poised to end the week with little change, with trading conditions thin due to a holiday in China.
Tokyo’s Nikkei fell over 2%, influenced partly by a stronger yen amid expectations of further rate hikes and additional comments from Japanese officials. Hong Kong’s Hang Seng Index edged 0.23% lower.
Traders remained cautious ahead of the closely watched U.S. nonfarm payrolls report, which would influence expectations for the Fed’s rate outlook. While solid U.S. economic data this week raised doubts about the pace and scale of Fed easing, comments from Fed Chair Jerome Powell reinforced expectations of rate cuts later this year.
Fed officials varied in their views on the necessity of easing, with some adopting a more conservative stance due to the resilience of the U.S. economy. This data-dependent approach suggested that the Fed required more confidence in disinflation before considering rate cuts.
The dollar strengthened against a basket of currencies following the comments from Fed officials, rebounding from a two-week low. Meanwhile, the euro and sterling weakened, and the yen reached a two-week high.
Fed fund futures indicated nearly 75 basis points of easing this year, aligning more closely with the Fed’s projections and marking a significant reduction from earlier expectations. This shift impacted U.S. Treasuries, with the 10-year yield near its highest level in over three months.
In commodities, Brent crude rose to $90.91 a barrel, supported by supply concerns, while U.S. crude also gained. Gold retreated from its record high, trading lower at $2,272.63 an ounce.
