Japanese and Korean stock markets collectively fell sharply, U.S. stock futures fell further, and Japanese government bond yields rose across the board.

# Bao Yilong

Source: Wall Street CN

The MSCI Asia Pacific Index fell as much as 2% on Tuesday, while the Nikkei 225 dropped more than 2%. South Korea’s KOSPI returned from a long holiday and led declines, sliding over 4% at one point. After surging roughly 7% on Monday, Brent crude extended gains on Tuesday, approaching the previous session’s high near $79.57 a barrel. The sharp rise in energy prices stoked inflation concerns; Australia’s 10-year government bond yield jumped 10 basis points to 4.73% in early Tuesday trading, and Japan’s 5-year yield also rose more than 5 basis points to 1.585%.

Ongoing Middle East tensions and a surge in oil prices fueled inflation worries, weighing on global financial markets on Tuesday. Asia-Pacific equities retreated during the session, U.S. Treasury yields held at elevated levels, and demand for safe-haven assets such as gold strengthened.

Asia-Pacific stocks fell across the board on Tuesday. The MSCI Asia Pacific Index declined as much as 2%, the Nikkei 225 lost more than 2%, and U.S. stock futures also moved lower, with S&P 500 futures down 0.7%.

South Korea’s KOSPI reopened after an extended holiday and led losses, tumbling more than 4% at one stage.

Despite heightened short-term volatility, Timothy Moe, Chief Asia Pacific Equity Strategist at Goldman Sachs, told media that the Middle East situation could act as a catalyst for a “long-overdue technical correction” in markets, but from a strategic perspective, it presents an opportunity to position for Asian assets as regional fundamentals remain constructive.

Moe stated:

“We see many positive factors for this region, and based on the information available, I see no reason to change our positive strategic view on Asian equities.”

The U.S. and Israel have continued strikes against Iran, while Iran has threatened to close the Strait of Hormuz. The surge in oil prices has lifted inflation expectations. Traders have pushed back bets on the Federal Reserve’s first rate cut to September, with expectations of a third rate cut in 2026 nearly erased. The repricing of the rate outlook has pressured both stocks and bonds.

After rallying roughly 7% on Monday, Brent crude extended gains on Tuesday, closing in on the prior day’s peak near $79.57 a barrel.

Goldman Sachs traders cited historical data showing that, in 22 instances since 2000 when WTI crude rose more than 10% in a single day, the S&P 500 typically delivered positive returns after an initial decline.

However, the sharp rise in energy prices has raised apprehensions about the inflation outlook. The 10-year U.S. Treasury yield held near the previous session’s level of around 4.04%. Australia’s 10-year government bond yield jumped 10 basis points to 4.73% in early Tuesday trading, and Japan’s 5-year yield climbed more than 5 basis points to 1.585%.

Reserve Bank of Australia Governor Michele Bullock said the central bank is “highly alert” to the risk that the Middle East conflict could affect inflation expectations, and stands ready to implement policy responses if necessary.

According to Bloomberg strategist Mark Cranfield, bonds in Australia, Japan and South Korea were sold off, with the overall tone in Asia’s fixed-income markets on the day tougher than implied by overnight moves in U.S. Treasuries.

Against a backdrop of deteriorating risk appetite, demand for safe-haven assets rebounded noticeably. Gold rose 0.7% to around $5,360 an ounce on Tuesday; silver gained 0.4%, trading near $90 an ounce.

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