Oil gains amid Middle East risks; Japan, S.Korea stocks drop

Key points:

• Oil prices climbed on geopolitical risks following reports that the US military has been directed to prepare for possible renewed strikes on Iran; however, no final decision has been taken.
• A tanker located about 51 nautical miles north of Madinat ash Shamal in Qatar was hit by multiple projectiles, resulting in casualties, according to the UK Maritime Trade Operations agency.
• Yemen's Houthi movement said it attacked Riyadh's King Khalid International Airport with a ballistic missile; Saudi Arabia has not verified the claim.
• Japan's Nikkei 225 dropped 1% and the Topix fell 1.5%, marking a second consecutive day of losses, with trading houses, banks and materials leading the decline.
• South Korea's Kospi declined 1%; Samsung shares fell despite the company reporting record preliminary quarterly profit.
• Gold rebounded towards $4,140, Treasuries eased slightly after a strong 10-year auction, and USD/JPY moved higher.

Oil and Middle East tensions

Crude prices rose during Asian trading as market participants assessed multiple risks in the Middle East. According to Axios, the Pentagon has directed US Central Command to finish preparations for a potential resumption of major combat operations in Iran, possibly ahead of the US midterm elections, though a final decision has not been taken. President Donald Trump also stated he was not interested in an agreement with Iran.

Risks to shipping in the Gulf have increased. A tanker approximately 51 nautical miles north of Madinat ash Shamal in Qatar was hit by several projectiles, and casualties have been reported, according to the UK Maritime Trade Operations agency.

On Thursday, Yemen's Iran-aligned Houthi movement said it had launched a ballistic missile attack on King Khalid International Airport in Riyadh. This claim was made hours after Saudi Arabia reported that a midweek attack on the same airport had resulted in one fatality. Saudi Arabia did not immediately confirm the latest attack.

In the US, supply worries also arose as Chevron and Shell started shutting down production at Gulf of Mexico facilities ahead of Tropical Storm Isaias.

Japan market

Japanese equities declined for a second consecutive session, as a sell-off on Wall Street and rising oil prices reignited inflation worries. The market had recently been trading near all-time highs. The Nikkei 225 dropped 1% and the broader Topix fell 1.5%. Cyclical stocks, particularly trading houses, banks and materials, led the downturn.

Nomura noted that AI and semiconductor stocks, as well as steelmakers and nonferrous metal producers, could stay under selling pressure. The brokerage added that robust domestic earnings prospects should cap further declines, making a recurrence of Wednesday's sharp sell-off improbable. A Reuters survey released on Thursday showed that over a third of Japanese companies view oil price volatility as their primary earnings risk.

South Korean stocks

The Kospi declined 1%. Samsung Electronics estimated its third-quarter operating profit at about 107 trillion won, marking its first quarter above 100 trillion won and exceeding consensus estimates. However, its shares dropped as some investors had expected even more.

Interest rates and currencies

US Treasuries fell by 4 ticks after yields moved in tandem with oil prices on Wednesday, with a strong 10-year auction offering support. The Fed minutes released on Wednesday indicated that most officials view another rate hike as probable by the end of the year. The US dollar opened marginally lower before recovering to nearly flat, while USD/JPY traded higher.

Gold prices

Gold recovered towards $4,140 an ounce as the dollar pulled back from an 18-month high, bouncing from Wednesday's two-month low. According to CME's FedWatch tool, traders are pricing an 80% probability of a Federal Reserve rate hike in December, with the prospect of higher rates putting pressure on gold today.

In the crypto space, two of Ethereum's most senior researchers have cautioned that rapid progress in AI-driven mathematics could weaken the cryptography safeguarding crypto wallets, potentially much earlier than the industry has prepared for.