Asian shares have turned hesitant as news of a fresh US military strike in Iran challenges investor optimism on a near-term peace deal, while US inflation data looms as a threat for bonds and interest rates.
Oil prices bounced two per cent and Treasury yields edged higher as the strike added to the conflicting signals over the talks after US President Donald Trump dismissed an Iranian report of a deal to restore 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 per cent probability on a deal being agreed, while cautioning 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."
With transits of the strait still only at a trickle, Brent crude rebounded 2.3 per cent to $96.50 a barrel, while US crude added 2.2 per cent to $90.59.
Yields on 10-year notes edged up two basis points to 4.502 per cent 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 easing 0.2 per cent on Thursday, while South Korean shares went flat.
MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.1 per cent.
Reports from Japan suggested the government planned to issue "bridging bonds" to fund flagship programs aimed at boosting investment in growth and economic security.
For Europe, EUROSTOXX 50 futures and DAX futures both slipped 0.2 per cent, while FTSE futures lost 0.3 per cent. S&P 500 futures and Nasdaq futures added 0.1 per cent.
The focus now shifts to US data on personal consumption expenditures (PCE), which include the Federal Reserve's preferred measures of inflation.
The pulse from fuel is expected to lift the headline PCE to a three-year high of 3.8 per cent, while the core is forecast to rise 0.3 per cent to an annual 3.3 per cent and far above the Fed's two per cent target.
The pick-up has led more Fed 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," argued analysts at NAB 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 3.75-4.0 per cent by year-end.
The shift in Fed expectations has helped underpin the US dollar, which was trading at 99.291 against a basket of currencies to be steady on the week.
The dollar crept to a four-week top on the yen at 159.57, nearing the 160.00 barrier that has triggered Japanese forex intervention in the past.
The euro was a shade lower at $1.1620, though it has support from expectations 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 eased 0.3 per cent to $4,445 an ounce, having again seen scant support as a safe haven or as a hedge against inflation risks.
Australian Associated Press
