Asian shares slip as bond volatility, Gulf tensions grip markets ahead of US jobs data

Asian stock markets retreated on Friday as investors navigated a treacherous landscape of bond volatility, currency swings, and geopolitical tension in the Middle East. The day's trading was dominated by wild moves in government debt markets, where the benchmark 10-year US Treasury yield had climbed to 5.34% overnight—its highest point since 2002—before pulling back to settle around 5.25% by Asian trading hours. That overnight surge capped the largest quarterly rise in Treasury yields in 32 years, a brutal repricing that left investors scrambling to recalibrate their positions across multiple asset classes.

The turmoil rippled through Europe with particular force. Concerns about France's fiscal health pushed the gap between French and German government bond yields to 140 basis points, the widest spread since 2012. That widening spooked European stock traders and hammered the euro, which fell to $1.1215—its lowest level since May 2025. The single currency also weakened sharply against the yen and Swiss franc, losing roughly 0.8% to 1% against each. These currency moves reflected a classic flight-to-safety trade: investors were pulling money out of riskier assets and into the dollar, the yen, and the Swiss franc, all perceived as safer harbors during periods of market stress.

In Asia itself, the damage was more measured but still visible. The MSCI index tracking Asia-Pacific shares outside Japan fell 0.5% on the day and was tracking toward a weekly loss of 1.7%. Japan's Nikkei dropped 0.7%, though it remained on pace for a 3.1% gain for the week. Mainland Chinese markets sat closed for a public holiday that would extend through the following Wednesday, removing a major source of trading activity from the region. US stock futures showed modest resilience after Treasury yields retreated: Nasdaq futures rose 0.3% and S&P 500 futures inched up 0.1%, suggesting Wall Street had staged a late-session recovery once the bond selling pressure eased.

The immediate focus for markets was the US nonfarm payrolls report due later that Friday. Economists were forecasting a gain of 90,000 jobs in September, with the unemployment rate expected to hold steady at 4.1%. But the real attention was on wage growth data. An earlier ISM survey had shown a sharp jump in prices paid by manufacturers, signaling mounting cost pressures in the economy. Chris Weston, head of research at Pepperstone, captured the stakes plainly: if wage growth came in hot, it could prove decisive for Federal Reserve policy and the direction of US interest rates and the dollar. He noted that while risk assets had absorbed the recent rise in real yields reasonably well, a sustained increase in the term premium—the extra return investors demand for lending money long-term—could become far more destabilizing.

The Fed's own messaging had shifted notably in recent days. Two senior policymakers had staked out an unusually clear case for pausing rate increases and gathering more economic data before deciding on the next move. That dovish turn had collapsed market expectations for an October rate hike: the probability of a hike that month had plummeted from 69% a week earlier to just 25%. But the market was still fully pricing in a December increase, suggesting investors believed the Fed would ultimately need to tighten further. The 2-year Treasury yield, which is most sensitive to near-term Fed moves, had fallen 10 basis points overnight and was up just 1 basis point at 4.8039% by Friday morning in Asia.

Oil markets remained elevated throughout the session, buoyed by military developments in the Middle East. The US had reportedly dispatched additional troops and aircraft carriers to the region, and China had suspended exports of refined oil products, raising concerns about potential global fuel supply disruptions. West Texas Intermediate crude futures held steady at $92.84 a barrel after jumping nearly 3% overnight, while Brent crude futures remained above $102 a barrel. The combination of geopolitical risk and the possibility of tighter supplies kept energy prices supported even as other risk assets retreated.

The dollar index, which measures the greenback against six major currencies, was firm at 102.09 on Friday and had rallied 0.6% overnight to hit its highest level since April 2025. The currency was on track for a third consecutive week of gains, up 1.1% for the period. The yen, meanwhile, had strengthened on data showing that underlying inflation in Tokyo had accelerated to 2.7% annually in September, bolstering the case for further Bank of Japan interest rate increases. The combination of higher US yields, safe-haven demand, and diverging monetary policy paths was reshaping currency markets in real time, with the dollar and yen gaining at the expense of the euro and other risk currencies.