Asian shares stumble, oil surges after US air strikes in Iraq

SHANGHAI (Reuters): Asian shares fell on Friday, erasing early gains, while oil prices spiked after US air strikes in Iraq killed a top Iranian commander, heightening geopolitical tensions.

Iranian Major-General Qassem Soleimani, head of the elite Quds Force and top Iraqi militia commander Abu Mahdi al-Muhandis were killed early on Friday in a US air strike on their convoy at Baghdad airport, the Pentagon said.

MSCI’s broadest index of Asia-Pacific shares outside Japan had touched its highest point since 15 June 2018 in early trade, but fell after reports of the air strike emerged. It was last down 0.26%.

China’s CSI300 index, one of the world’s best-performing indexes last year, also turned negative, losing 0.25%. Australian shares were 0.66% higher, but that was off earlier highs.

“It remains very unclear exactly what impact (the US strikes) could have on the equity market,” said Tapas Strickland, director of economics and markets at National Australia Bank.

“It is significant that one of Iran’s top military generals was reported to have been taken out ... but it all hinges on what Iran does in terms of retaliation,” he said.

Middle Eastern tensions upset a rally for the MSCI index, which finished at its highest close in more than 18 months on Thursday.

It had been lifted by a New Year’s Day announcement from China’s central bank that it would cut the amount of cash that banks must hold as reserves, releasing around 800 billion yuan ($ 114.87 billion).

Against the backdrop of a thaw in trade relations between the United States and China, global markets had seen renewed appetite for risk assets.

“You have from both a policy and trade perspective a favourable framework for ... risk assets for the weeks to come,” said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong.

“The issue in our view, and that is the central scenario, is beyond these few weeks – where could we see a further correction?” he said, noting that the United States is unlikely to enjoy further fiscal stimulus before the presidential election in November.

Shares had received further support from data on Thursday showing factory activity in China continued to grow at a solid pace in December, and that business confidence improved.

South Korean factory activity also improved in December, returning to growth after seven straight months of contraction, which analysts saw as a positive sign for global growth.

Markets in Japan remain closed for a national holiday.

Overnight, Wall Street’s major indexes notched record highs in their first session of the decade. The Dow Jones Industrial Average rose 1.16% to 28,868.8. The S&P 500 gained 0.84% to 3,257.85 and the Nasdaq Composite added 1.33% to 9,092.19.

But US stock futures pointed to a grim day on Friday after the air strikes, with S&P e-minis shedding 0.8%.

While equity markets turned lower, oil prices surged on news of Soleimani’s death, with global benchmark Brent crude shooting 3.02% higher to $ 68.25 per barrel and US West Texas Intermediate crude jumping 2.75% to $ 62.86 per barrel.

News of the strikes came after US Defence Secretary Mark Esper said on Thursday there were indications Iran or forces it backs may be planning additional attacks after Iranian-backed demonstrators hurled rocks at the US Embassy in Baghdad following American strikes on Sunday against bases of the Tehran-backed Kataib Hezbollah group.

Esper warned that the “game has changed” and it was possible the United States might have to take pre-emptive action to protect American lives.

In currency markets, the dollar weakened as investors snapped up safe-haven yen. The greenback fell 0.52% against the Japanese currency to 108.00.

The dollar was flat against the euro at $ 1.1170.

The dollar index, which tracks the dollar against a basket of six major rivals, was down 0.09% at 96.758.

The US strikes in Iraq and a weaker dollar combined to burnish the value of gold, driving the precious metal 0.75% higher on the spot market to $ 1,540.25 per ounce, around four-month highs.