Asian Stocks Extend Global Rout; Bonds Hammered as War Drags On

• Nasdaq down nearly 11% from recent high, confirming correction
• Trump delays Iran ultimatum by another 10 days
• Oil prices slip, Wall St futures bounce, but small moves overall
• Bonds tumble as inflation fears bite, US dollar in demand

By Stella Qiu

SYDNEY, March 27 (Reuters) - Asian stock markets were swept up in a global rout on Friday, tracking Wall Street lower as the threat of a protracted energy shock out of the war-torn Middle East sent borrowing costs spiralling higher.

Investors took a modicum of comfort from U.S. President Donald Trump's decision to extend his ultimatum to strike Iranian power plants by 10 days, after pushing back his initial 48-hour deadline by five days. Brent crude futures LCOc1 fell 1% to $107.07 a barrel having jumped nearly 6% overnight.

However, movement in oil prices was small and reports that Trump was considering sending more troops only added to concern about the war escalating into a ground conflict, with no certainty that the Strait of Hormuz could be reopened to shipping soon.

Iran has dismissed a U.S. proposal to end the conflict as "one sided and unfair".

Wall Street futures bounced 0.2% in Asia. Overnight, the Nasdaq Composite .IXIC slumped 2.4% to be down nearly 11% from its record close on October 29, confirming it has been in a correction since then.

"The Middle East headlines won't stop for the weekend so the weight of money leans towards assuming another risk-off week ahead as the U.S. continues to add military resources to the region," said ITC Markets senior FX analyst Sean Callow.

"Many see the Iranian regime as holding the upper hand and doubt that there are indeed productive negotiations with the U.S. in process... Underlying pressure towards higher oil prices, USD and yields along with weaker equities appears intact."

On Friday, MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS tumbled 1.4% and was set for a weekly drop of 3%. Japan's Nikkei .N225 skidded 1.3% and was down 0.9% for the week.

South Korea's KOSPI .KS11 plunged 3%, bringing its weekly loss to a staggering 8.5%. Chinese blue chips .CSI300 fell 1%, while Hong Kong's Hang Seng index .HSI slipped 0.4%.

Citi analysts said more severe scenarios of the Middle East conflict could drag global growth below 2% this year, push headline inflation beyond 4% and stoke recession risk.

"Asia, particularly Korea, Japan, and India, faces the most intense headwinds due to heavy reliance on imported fuel and direct exposure to disruptions in the Strait of Hormuz," they said in a client note.

GLOBAL BOND YIELDS SURGE

Norway's Norges Bank was the latest central bank to flag inflation risk and interest rate hikes ahead as the war rages on. Having held policy steady on Thursday, the bank said it expected to raise rates this year, a stark contrast with its earlier forecast of three cuts by the end of 2028.

Global bond yields jumped anew after the climb in oil prices amplified inflation concern. Japan's 10-year yields JP10YTN=JBTC rose 4 basis points to 2.31%, while Australia's benchmark 10-year yields AU10YT=RR surged 7 bps to 5.076%.

The two-year U.S. Treasury yield US2YT=RR held steady at 3.9714% on Friday, having jumped 10 basis points overnight as traders priced in more risk of a rate rise from the U.S. Federal Reserve this year, which is about 50% priced in. 0#USDIRPR

In currencies, the U.S. dollar was bathed in safe-haven glow having gained for three sessions. The risk-sensitive Australian dollar AUD= bore the brunt of market selloff, falling 0.2% to a two-month low of $0.6872 after a 0.8% fall overnight.

The euro EUR= held at $1.1533 after slipping 0.3% overnight, while the yen JPY= hovered at 159.70 a dollar. Market watchers expect intervention should the yen hit 160.

Gold XAU= rose 0.6% to $4,405 an ounce after a nearly 3% fall overnight.