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A man looks at an electronic board showing the Nikkei stock index outside a brokerage in Tokyo, Japan, January 7, 2019. (File photo)

KIM KYUNG-HOON/Reuters

Financial markets were roiled on Wednesday after Iran fired missiles at U.S. forces in Iraq, sending Asian stocks and U.S. Treasury yields sliding and jolting oil prices higher as investors feared a wider conflict in the Middle East.

Iran’s missile attacks on the Ain Al-Asad air base and another in Erbil, Iraq, early in the day came hours after the funeral of an Iranian commander whose killing in a U.S. drone strike has intensified tensions in the region.

Early reports of the attacks sparked a sudden rise in risk aversion on worries over how the United States would respond. But by early afternoon, Asian equities had trimmed losses, the yen had stabilized somewhat and U.S. bonds tempered their rally as investors paused for breath.

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“We are getting exaggerated moves but that’s of course volatility playing. Markets simply hate uncertainty. It’s an old adage but it definitely holds true in the current situation - markets can price risks but they can’t price uncertainty,” said James McGlew, executive director of corporate stockbroking at Argonaut in Perth.

U.S. President Donald Trump said in a tweet late on Tuesday that an assessment of casualties and damage from the strikes was under way and that he would make a statement on Wednesday morning. Trump said that “All is well!” and “So far, so good!.”

A U.S. official said the United States was not aware of any casualties from the strikes.

MSCI’s broadest index of Asia-Pacific shares outside Japan was down 0.5% around 0445 GMT, having dropped more than 1% earlier in the day. China’s blue-chip CSI300 index was 0.48% lower.

Japan’s Nikkei was down 1.29%, also paring earlier losses of over 2%, while Australian shares clawed back from a more-than-1% drop to shed 0.18%. U.S. S&P500 e-mini stock futures, which had earlier tumbled nearly 1.7%, were down 0.28%.

Rob Carnell, Asia-Pacific chief economist at ING in Singapore, said possible further escalation of tensions between Iran and the United States could still provoke a prolonged negative market reaction.

“If you see U.S. treasuries rallying a bit this morning, expect them to rally quite a bit further should there be a forceful response from the United States, which I’d imagine there would be...from a market perspective I think this one could run and run,” he said.

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The yield on benchmark 10-year U.S. Treasury notes last stood at 1.7864%, down from a U.S. close of 1.825% on Tuesday, but up from session lows. U.S. 10-year Treasury futures had earlier peaked at their highest level since November, and were last up 0.24%.

The two-year yield fell to 1.5183% compared with a U.S. close of 1.546%.

The yen, which had hit its strongest point against the greenback since October in morning trade, gave up most of its gains later in the day. The U.S. currency was last down just 0.08% against the yen at 108.33.

The euro was 0.04% weaker, buying US$1.1147 and the dollar index, which measures the greenback against six major peers, was 0.07% lower at 96.940.

In commodity markets, global benchmark Brent crude futures shot back above US$70 per dollar to their highest level since mid-September in the initial hours after Iran’s strikes.

They were last up 1.36% at US$69.20 per barrel, while U.S. crude added 1.26% to US$63.49 a barrel.

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Gold also fell below a key psychological level as initial fears eased. The precious metal was 1.16% higher on the spot market at US$1,592.18 per ounce, having earlier blasted through US$1,600.

On Tuesday, shares on Wall Street had amid worries over U.S.-Iran tensions. The Dow Jones Industrial Average fell 0.42%, the S&P 500 lost 0.28% and the Nasdaq Composite dropped 0.03%.

Analysts say the escalating Middle East tensions are likely to keep markets on edge.

“If it does look like we’ve got U.S. casualties, then I don’t think Trump is going to just stand back and take that,” said Matt Simpson, a senior market analyst at Gain Capital in Singapore. “World War III has been thrown around. I don’t think we’re there yet. But it does look like Iraq II.”

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