Asian equities fell as oil prices rose and government bonds remained under pressure, signaling a darkening macroeconomic picture as the Iran crisis drags on.
The expiration of the short-lived U.S.-Iran ceasefire has rekindled fears of renewed Middle East escalation. Iranian attacks on shipping in the Strait of Hormuz are piling up without an American military response, raising the risks of crossing the strategic waterway and frustrating some Arab allies who worry the U.S. doesn't have a strategy to wind down the conflict.
The latest developments in the Middle East have pushed oil prices back near $90 a barrel. Front-month Brent crude oil futures were recently 0.7% higher at $91.62 a barrel, and front-month West Texas Intermediate crude futures rose 0.75% to $85.58 a barrel.
That has hammered the global bond market, sending long-term yields to multiyear highs in recent days. The 30-year U.S. Treasury yield hit its highest level since 2007 amid the bond selloff.
The 10-year Japanese government bond yield fell 2 basis points to 2.915% early Wednesday after rising as high as 2.945% on Tuesday, its highest intraday level since 1996. Australia's 10-year government bond yield dropped 3 basis points to 5.0300%.
In addition to the latest flare-up in the Middle East conflict, "the recent muddied communication from Fed Chair Kevin Warsh left markets unclear about the Fed's reaction function and commitment to fight inflation," MUFG's Michael Wan said in a note.
Meanwhile, massive corporate debt issuance by tech companies to fund their AI infrastructure buildout is competing with sovereign debt for investor capital, driving government bonds prices lower and yields up.
In the coming quarters, global bond markets are likely to "remain vulnerable to renewed bouts of volatility," two economists at Capital Economics said in a commentary. Governments appear reluctant to pursue meaningful fiscal consolidation and central banks seem constrained in their response, the economists added.
Asian equities were also broadly lower, dragged by chip stocks, following Wall Street losses overnight. South Korea's Kospi sank 5.5% and Japan's Nikkei Stock Average was 2.6% lower at midday. Taiwan's Taiex shed 1.3% and Hong Kong's Hang Seng Index was roughly flat.