Asia shares slip on Middle East woes, rising yields

Asian shares slipped on Monday as the risk of a wider conflict in the Middle East clouded sentiment in a week laden with data on US growth and inflation as well as earnings from some of the world's largest tech companies.

Bonds were also under pressure as US 10-year Treasury yields US10YT=RR crept to within a whisker of 5.0%, pushing borrowing costs up across the globe and testing equity valuations.

Washington warned over the weekend of a significant risk to US interests in the region as ally Israel pounded Gaza and clashes on its border with Lebanon intensified.

The European Central Bank and Bank of Canada also hold policy meetings and, while no hikes are expected, investors will be sensitive to guidance on futures moves.

The recent surge in bond yields has tightened monetary conditions without the central banks having to do anything, allowing the Federal Reserve to signal it will likely stay on hold at its policy meeting next week.

Indeed, futures imply around a 70% chance the Fed is done tightening for this cycle and are flirting with the chance of rate cuts from May next year. FEDWATCH

The jump in yields has challenged equity valuations and dragged most of the major indices lower last week, while the VIX 'fear index' of US stock market volatility .VIX hit its highest since March.

On Monday, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS slipped 0.4% to its lowest in almost a year. China's blue chip index .CSI300 lost 0.7% to its weakest since early 2019.

Japan's Nikkei .N225 eased 0.4%, as did South Korea's market .KS11.

EUROSTOXX 50 futures STXEc1 and FTSE futures FFIc1 were flat. Both S&P 500 futures ESc1 and Nasdaq futures NQc1 added 0.2%, underpinned by hopes a rush of earnings reports this week will provide some support.

Mega caps Microsoft MSFT.O, Alphabet GOOGL.O, Amazon AMZN.O and Meta Platforms META.O are all reporting. IBM IBM.N and Intel INTC.O are also on the docket.

GROWTH SURGE

Profits should be supported by the strength of consumer demand with figures on US gross domestic product this week expected to show annualised growth of a heady 4.2%, and nominal growth possibly as high as 7%.

"At the same time, last quarter's modest rise in hours worked points to a strong productivity gain and surge in corporate profits," wrote JPMorgan chief economist Bruce Kasman in a note.

"As corporate and household income share the benefits of this nominal activity surge, the underlying resilience of the US private sector is being reinforced."

This US outperformance has underpinned the dollar, though the threat of Japanese intervention has capped it around 150.00 yen at least for the moment. The dollar was last trading at 149.90 yen JPY=EBS, just below the recent peak of 150.16.

Yields in Japan were also on the rise after the Nikkei newspaper reported the Bank of Japan as discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on October 31.

The euro was flat at $1.0582 EUR=EBS, while the Swiss franc CHF= held firm at 0.8927 per dollar having benefited from safe haven flows over the past couple of weeks.

Gold has likewise attracted a safety bid to stand at $1,970 an ounce XAU=, having hit its highest since May last week. 

Oil prices gave back some ground in the absence of any disruption to supplies from the Middle East, at least for now.

Brent LCOc1 was last down 73 cents at $91.43 a barrel, while US crude CLc1 eased 82 cents to $87.26.