By Ankur Banerjee
SINGAPORE, March 13 (Reuters) - Asian stocks slumped on Friday, poised for a second straight weekly decline as fast-dwindling hopes of a resolution to the U.S. and Israel's war with Iran kept oil prices aloft, casting a shadow over global markets and spurring inflation fears.
The U.S. dollar has become the safe-haven of choice during the tumult, putting most other currencies under pressure. The dollar was set for a second consecutive week of gains and is up 2% since the war broke
out at the end of February.
Oil prices remained close to the closely watched $100 per barrel level, although they eased a bit in early trading on Friday after U.S. issued a 30-day license for countries to buy Russian oil and petroleum products currently stranded at sea.
Brent futures were last at $99.85 a barrel, while West Texas Intermediate crude was at $95.05 a barrel.
In Asia, MSCI's broadest index of Asia-Pacific shares eased 0.5%, on course for a 1.5% decline for the week. Japan's Nikkei fell 1.3%, while tech-heavy South Korean stocks slid nearly 2% and Taiwan equities fell 1%.
With Iran stepping up attacks across the Middle East as its new Supreme Leader Mojtaba Khamenei vowed to keep the Strait of Hormuz shipping lane closed, investors are bracing for a prolonged conflict and higher oil prices.
The spectre of rising inflation has led markets to rapidly reprice what they expect from central banks this year, with traders now anticipating just 20 basis points of easing from the Federal Reserve compared to 50 bps of cuts priced in last month.
"Markets were positioned for Fed cuts this year but the runway to justify Fed cuts is no longer there with the U.S. excursion into Iran," said Prashant Newnaha, senior rates strategist at TD Securities. "The markets are recalibrating for a higher terminal rate."
The selloff in global stocks and bonds shows no signs of easing. U.S. stocks fell sharply overnight and the two-year Treasury yields, which typically move in step with Fed interest rate expectations, scaled a six-month high on Thursday.
"With the possibility of higher oil prices still elevated, investors should be prepared for continued volatility and potentially further downside in the near term," said Vasu Menon, managing director of investment strategy at OCBC in Singapore.
INFLATION WORRIES SWIRL
Jose Torres, senior economist at Interactive Brokers, said the negative impact of rising oil prices on corporate margins, inflation expectations, rate-cut prospects and yields is sparking market volatility, leaving participants with few places to hide.
"Indeed, sinking optimism about Fed rate reductions amid strengthening cost pressures is weighing on traditional safe havens such as silver, gold, and government debt."
The two-year note yield eased 3 bps to 3.730% after hitting its highest level since August 22 on Thursday. The yield has gained 35 bps in the two weeks since the war started.
The yield on the longer-dated 30-year bond has risen 24 bps this month.
Investor focus will switch to a slate of policy meetings next week with the Fed, the Bank of Japan, the European Central Bank and the Bank of England all due to meet, with most expected to keep rates unchanged. The Reserve Bank of Australia is broadly expected to hike rates next week.
In currencies, the euro last fetched $1.1527, inching higher on the day but still on course for a weekly decline of nearly 1%. The dollar index was at 99.599, set for an 0.8% rise for the week.
The yen firmed a bit to 159.13 per dollar, hovering around the 160 mark but the noise around possible intervention has been fairly muted. Analysts said the bar for intervention from Tokyo is higher due to the oil price shock.
"What was once a 'line in the sand' at 160 has evolved into more of a moving goalpost," said Tony Sycamore, market analyst at IG.
"Against such a hostile macro backdrop, it makes little sense for authorities to waste precious intervention ammunition—whether verbal or physical, trying to defend the 160ish level this time around."
Gold was 0.7% higher at $5,114 per ounce on Friday but set for a 1% drop for the week.
(Reporting by Ankur Banerjee in Singapore; Editing by Sam Holmes)
