GLOBAL MARKETS: Asian stocks extend global rout; bonds hammered as war drags on

SYDNEY – Asian stock markets fell sharply on Friday, following Wall Street lower as concerns over a prolonged energy crisis in the Middle East drove borrowing costs higher.

Investors cautiously welcomed U.S. President Donald Trump's decision to extend his ultimatum to strike Iranian power plants by 10 days, after initially delaying his 48-hour deadline by five days. Brent crude futures fell 1% to $107.07 a barrel, after a nearly 6% jump overnight.

Despite the small drop in oil prices, reports that Trump is considering sending additional troops added to fears of an escalating ground conflict, with no clarity on when the Strait of Hormuz might reopen for shipping. Iran rejected a U.S. proposal to end the conflict, calling it “one-sided and unfair.”

Wall Street futures rose 0.2% in Asia. Overnight, the Nasdaq Composite dropped 2.4%, down nearly 11% from its record close on October 29, confirming its correction trend.

“The Middle East headlines won’t stop over the weekend, so the market leans toward another risk-off week ahead as the U.S. adds military resources to the region,” said Sean Callow, senior FX analyst at ITC Markets. “Many see the Iranian regime as holding the upper hand, and doubts remain over productive negotiations with the U.S. Oil prices, the U.S. dollar, and yields may continue rising, while equities remain under pressure.”

On Friday, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.4%, set for a weekly drop of 3%. Japan’s Nikkei slipped 1.3%, down 0.9% for the week. South Korea’s KOSPI plunged 3%, with an 8.5% weekly loss. Chinese blue chips fell 1%, while Hong Kong’s Hang Seng dipped 0.4%.

Citi analysts warned that a worsening Middle East conflict could reduce global growth below 2% this year, push inflation above 4%, and increase recession risks. “Asia, particularly Korea, Japan, and India, faces the strongest headwinds due to reliance on imported fuel and exposure to disruptions in the Strait of Hormuz,” they said.

Global Bond Yields Surge

Norway’s Norges Bank became the latest central bank to flag inflation risks and potential interest rate hikes. After holding policy steady on Thursday, the bank said it now expects to raise rates this year, reversing its earlier forecast of three cuts by 2028.

Global bond yields jumped as higher oil prices fueled inflation concerns. Japan’s 10-year yields rose 4 basis points to 2.31%, while Australia’s 10-year benchmark surged 7 basis points to 5.076%. The two-year U.S. Treasury yield held at 3.97%, after rising 10 basis points overnight amid expectations of a Federal Reserve rate hike.

Currencies and Gold

The U.S. dollar strengthened for a third straight session as a safe-haven asset. The Australian dollar fell 0.2% to a two-month low of $0.6872, after a 0.8% drop overnight. The euro held at $1.1533, while the yen hovered at 159.70 per dollar, with intervention possible if it reaches 160.

Gold rebounded 0.6% to $1,405 an ounce, following a nearly 3% fall overnight.

-Reporting by Stella Qiu; Editing by Christopher Cushing/Reuters