GLOBAL MARKETS-Brent crude set for record monthly gain; Asia shares falter as Iran war rages

By Rae Wee

SINGAPORE, March 31 (Reuters) - Oil prices on Tuesday were set for a record monthly rise while Asian shares were headed for their steepest fall since 2022, capping a tumultuous month as the war in the Middle East stoked fears of higher inflation and slower growth.

Bonds were headed for their largest decline in months, owing to the hawkish sea change in the global outlook for interest rates, while the dollar recorded its strongest gain in eight months.

A month into the war, investors continue to be whipsawed by a barrage of headlines as tensions and attacks between the U.S., Israel and Iran escalate.

"It appears markets have gone from just mechanically trading headlines ... into a little bit more of a fear mode, taking risk off the table," said Vishnu Varathan, Mizuho's head of macro research for Asia ex-Japan.

"That partly might have to do with the transition from earlier thinking that there's a good chance of Trump being able to control the timeline and/or your TACO trade, to now beginning to be concerned or fearing a more prolonged conflict."

Markets turned a little more upbeat after The Wall Street Journal reported that U.S. President Donald Trump told aides he is willing to end the military campaign against Iran even if the Strait of Hormuz remains largely closed.

U.S. futures reversed early losses, with Nasdaq futures NQc1 up 0.34% and S&P 500 futures ESc1 gaining 0.4%.

EUROSTOXX 50 futures STXEc1 rose 0.15% and DAX futures FDXc1 were up 0.26%.

Still, Brent crude futures LCOc1 were up roughly 2% at $114.98 per barrel, taking their gains for the month to roughly 59%, the largest on record.

U.S. crude CLc1 advanced 1.8% to $104.73 a barrel and was headed for a monthly rise of roughly 56%, the most in nearly six years.

"I think inflation will be the bigger near-term concern for global markets," said Thomas Mathews, head of markets for Asia-Pacific at Capital Economics.

"But if oil prices don't fall back over the next few months, we will probably have to start thinking about growth too."

The higher-for-longer energy prices have meant more pain for Asia, which is highly reliant on energy from the Middle East.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS was down 0.55% and on track for a monthly fall of more than 12%, the most substantial decline since September 2022.
Japan's Nikkei .N225 was down 0.93% and was set to lose 12.6% this month, while South Korea's Kospi .KS11 was headed for a monthly decline of more than 17%, the most since 2008.

BONDS UNDER WATER, DOLLAR IS KING

The threat of inflation has led investors to ramp up expectations for rate hikes across major central banks this year, which in turn hammered bonds.

The Federal Reserve is now expected to keep rates on hold this year 0#USDIRPR, compared with more than 50 basis points worth of easing priced in prior to the start of the war.

Fed Chair Jerome Powell on Monday said the U.S. central bank can wait to see how the Iran war affects the economy and inflation, noting that policymakers typically look through shocks such as those from higher oil prices.

U.S. Treasury yields steadied on Tuesday, though the two-year yield US2YT=RR was set to rise more than 40 bps for the month, its largest increase since October 2024.

The benchmark 10-year yield US10YT=RR has similarly advanced about 37 bps in March, its largest monthly rise since December 2024.

In currencies, the dollar was headed for its biggest monthly gain since July, having emerged as one of the few safe-haven assets amid the war.

Against a basket of currencies, the greenback =USD was set to rise roughly 2.9% this month. The euro EUR=, which last bought $1.1474, was headed for a nearly 3% monthly loss while sterling GBP= was down more than 2% in March.

The yen JPY= remained a whisker away from a 160 per dollar level and was last 0.1% weaker at 159.93.

In precious metals, spot gold XAU= was up 0.6% at $4,538.07 an ounce.