Asian stocks fall as oil prices rise and inflationary pressures increase

SadaNews - Asian stocks declined as attacks on key energy infrastructure in the Middle East pushed oil prices higher, raising investor concerns that the escalation of the war could increase inflationary pressures.

The "MSCI Asia-Pacific" index fell more than 2%, ending a three-day rally, as investors trimmed risks.

The Japanese "Nikkei 225" index dropped by 2.8%, while traders remained alert to the possibility of the yen exceeding 160 against the dollar. In contrast, U.S. stock futures rose slightly after both the "S&P 500" and "Nasdaq 100" fell by 1.4% on Wednesday.

Brent crude traded near $112 a barrel amid strikes by Iran and Israel on vital energy facilities, with Iranian strikes causing extensive damage to the world's largest liquefied natural gas export facility in Qatar, increasing fears of a longer-lasting impact from the conflict.

Oil pressures confuse central banks and markets

The rise in oil has already raised concerns among global central banks about price pressures.

The Bank of Japan kept interest rates unchanged on Thursday, following a similar move by the Federal Reserve on Wednesday, with both indicating that the conflict in the Middle East is overshadowing monetary policy outlooks.

The Asian stock index dropped about 8% in March, lagging behind its peers in the U.S. and Europe.

Morgan Stanley strategists, including Jonathan Garner and Crystal G, noted in a memo that "Asia is more vulnerable than other regions to the ongoing disruptions in oil, liquefied natural gas, and other inputs." They also advised investors to sell the recent rally in regional stocks this week.

Iran conducted strikes on a liquefied natural gas site in Qatar, one of the assets it threatened to target following strikes on the giant "South Pars" field.

U.S. President Donald Trump stated that the U.S. was unaware of the Israeli attack on the field, but threatened to "blow the field completely" using U.S. forces if Qatari assets were targeted further.

He added earlier this week that targeting oil infrastructure at Iran's main export hub on Kharg Island remains an option following bombings of military targets there.

Interest rate forecasts change as inflation rises

Federal Reserve officials still expect one rate cut this year, although its chair Jerome Powell emphasized that resuming rate cuts requires progress in reducing inflation. Powell told reporters after the decision: "If we don’t see that progress, we won’t see a rate cut."

His comments prompted traders to reduce their expectations for rate cuts, which bolstered views that rates would remain high for an extended period amid energy market volatility. Traders now price in about 15 basis points of easing this year, down from a full quarter-point cut.

Key takeaways from the Fed's March decision

In the economic forecasts released alongside the decision, Fed officials raised their inflation expectations for 2026 to 2.7% from 2.4%. Notably, they also predicted the core measure, excluding the volatile food and energy categories, would rise to 2.7%.

Treasury bonds declined across various maturities on Wednesday, with the two-year bond yield rising by about 10 basis points. The yield increased by an additional three basis points to reach 3.80% on Thursday.

Currency and gold movements amid market volatility

In other markets, the Philippine peso fell past the 60 level against the dollar, affected by rising oil prices impacting the country's economic outlook. A broader dollar index declined by 0.1% after rising 0.5% on Wednesday. Gold prices stabilized after dropping about 4% in the previous session.

Bank of Japan Governor Kazuo Ueda is scheduled to hold a press conference later on Thursday, typically around 3:30 PM Tokyo time, to explain the decision and provide his outlook on interest rates.

Chris Weston, Head of Research at Pepperstone Group, wrote in a note: "There’s no doubt that rising oil prices are starting to have a broader impact. As volatility rises, headline risks remain strongly present."

He added: "Once again, developments in the energy sector are leading asset flows across various asset classes."