Asian Stocks Fall on Fed, Middle East Concerns — Update

By Kimberley KaoAsian stock markets fell Thursday, tracking U.S. futures, as investors weighed concerns about inflation in the U.S. and potential escalation in Middle East tensions.Japan's Nikkei Stock Average declined 1.0%, Hong Kong's Hang Seng Index fell 2.0% and China's Shanghai Composite Index was 0.8% lower.Futures tied to U.S. indexes were in the red. Dow and S&P 500 futures were both down 0.3%, while Nasdaq futures fell 0.45%.Federal Reserve Chair Jerome Powell on Wednesday projected confidence when he insisted the central bank was in a good position to handle whatever the economy does next, but acknowledged that the Fed has little idea what's actually coming."We haven't been through a situation like this, and I think we have to be humble about our ability to forecast it," Powell said.The Fed's assessment indicates that the U.S. economy is in good shape, but President Trump's policies and their unintended consequences will contribute to market volatility in the second half of this year, said Tai Hui, Asia-Pacific chief market strategist at J.P. Morgan Asset Management, in a note.While the Fed's decision to retain the status quo was widely expected, the key context is that more Fed members now see fewer rate cuts this year, reflecting their expectations for elevated and persistent uncertainty, Vishnu Varathan of Mizuho Securities said in a note.Economic projections show officials expect U.S. inflation and unemployment to rise this year by more than they projected in March.Still, markets seem less fussed about the Fed decision and more concerned about geopolitics, Varathan said."For now, the Iran-Israel conflict is likely to drown out Fed nuances as headline-driven instincts for risk re-pricing will dominate," he said.Front-month WTI crude oil futures were 0.6% higher at $75.58 a barrel on Thursday afternoon in Asia. Brent crude futures were up 0.4% at $77.01 a barrel. Both benchmarks flitted between gains and losses in Asian trading.Crude prices have risen nearly 20% in June, with more than half of the gains occurring just this week, said Priyanka Sachdeva, senior market analyst at Phillip Nova, in a note."Investors, however, are still preparing for volatility," Sachdeva said.Goldman Sachs research analysts said in a note that the investment bank's "global indices of oil shipping rates reflect an increase over the past week as increased risks have lifted rates for Middle Eastern routes."The probability of U.S. military action against Iran appears to be higher than a U.S.-Iran nuclear deal, meaning that oil markets will likely see elevated prices over the next few months, the Goldman analysts said.Write to Kimberley Kao at [email protected]