Source: AFP
Asian shares fell and oil prices rose on Tuesday on growing fears of a wider war in the Middle East after Israel’s army chief vowed to respond to Iran’s unprecedented attack on his country over the weekend.
The sell-off came after Wall Street’s three main indexes fell in response to U.S. retail sales data that reinforced views that the world’s top economy remained in rough shape and further dampened hopes for rate cuts this year.
Traders were also digesting mixed data showing that Chinese growth easily beat expectations in the first three months of the year, but retail sales and industrial production were well below the mark.
All eyes are on the Middle East after Tehran fired hundreds of missiles and drones at its regional foe, saying the attack was in retaliation for an April 1 strike on its embassy’s consular annex in Damascus that killed seven Revolutionary Guards, including two generals.
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While air defense systems destroyed the vast majority of the dam and Iran said “the matter can be considered concluded,” Israel’s army chief, Gen. Herchi Halevi, issued a warning note, fueling concerns of a dangerous escalation.
“This launch of so many (Iranian) missiles, cruise missiles and UAVs on the territory of the State of Israel will be met with a response,” Halevi told soldiers at the Nevatim military base, which was hit in Saturday’s Iranian barrage.
However, he added that the army would not withdraw from the war against Hamas in Gaza.
Warren Patterson, at ING Groep, said the prospect of a response from Tel Aviv “means that this uncertainty and tension will remain for some time.”
“The more escalation we see, the more likely we are to see oil supply from the region affected.”
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Oil prices rose in Asian trade after retreating on Monday on hopes of a de-escalation following US calls for Israeli Prime Minister Benjamin Netanyahu to “win” and abandon the counter-offensive.
In early trade, Tokyo, Hong Kong, Shanghai, Seoul, Singapore, Taipei, Wellington, Manila and Jakarta all fell sharply.
China mixed data
Investors appeared to ignore data showing China’s economy grew 5.3 percent in the first three months of the year, well above the 4.6 percent forecast by an AFP survey of analysts.
However, other data added to concerns about the outlook, with industrial production and retail sales coming in well below forecasts, adding to worries about the outlook for the next quarter.
“The China data appears to be strong in the headline, but the details are weak,” said Saxo’s Charu Chanana.
“This would suggest that the economy needs more support and markets will continue to be positioned for a weak yuan.”
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The losses in Asia followed a big sell-off on Wall Street, dragged down by tech giants including Amazon, Apple and Alphabet.
That came after data showed March retail sales beat expectations in another sign the U.S. economy remains strong despite two-decade high interest rates.
The measure followed news that inflation beat estimates for the third straight time last month, while job creation was also much stronger than forecast, putting pressure on the Federal Reserve to keep interest rates on hold.
Investors are now betting on just two cuts this year, compared with six penciled in at the start of January.
And UBS has warned that borrowing costs could even rise if inflation is not brought under control.
“If the (economic) expansion remains resilient and inflation is stuck at 2.5 percent or higher, there will be a real risk that (the Fed’s policy board) will continue to raise interest rates again early next year,” the strategists said of UBS, including Jonathan Pingle and Bhanu Baweja.
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Meanwhile, San Francisco Fed chief Mary Daly said there was no rush to cut rates yet, adding that she wanted to be sure inflation would fall to the bank’s two percent target.
Bonds hit fresh year-to-date highs on Monday after the retail sales report.
With interest rates staying higher for longer, the dollar continued to strengthen and briefly hit a new 34-year high of 154.45 yen, focusing on Japanese authorities amid speculation they will step in to support the currency.
Finance Minister Shunichi Suzuki said on Tuesday that “we are closely monitoring the latest developments”.
Keys around 03:00 GMT
Tokyo – Nikkei 225: Down 2.1 percent at 39,405.58 (break)
Hong Kong – Hang Seng Index: DOWN 1.5 percent at 16,346.71
Shanghai – Composite: DOWN 1.5 percent at 3,011.12
West Texas Intermediate: UP 0.9 percent to $86.14 a barrel
North Sea Brent crude: UP 0.8 percent at $90.80 a barrel
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Dollar/yen: UP to 154.36 yen from 154.24 yen on Monday
EUR/USD: DOWN at $1.0608 from $1.0626
GBP/USD: DOWN to $1.2423 from $1.2449
Euro/pound: UP at 85.38 pence from 85.31 pence
New York – Dow: DOWN 0.7 percent at 37,735.11 (close)
London – FTSE 100: Down 0.4 percent at 7,965.53 (close)
Source: AFP