By Andrew Galbraith
SHANGHAI (Reuters) - Asian shares and U.S. treasury yields tumbled on Wednesday, while the yen, gold and oil shot higher after Iran fired rockets at Iraqi airbases hosting U.S. military forces, stoking fears of a wider conflict in the Middle East.
Iran's missile attacks on the Ain Al-Asad air base and another in Erbil, Iraq, early Wednesday came hours after the funeral of an Iranian commander whose killing in a U.S. drone strike has intensified tensions in the region.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was 1% lower shortly after China's share markets began trading, with China's blue-chip CSI300 index <.CSI300> down 0.56%.
Japan's Nikkei <.N225> tumbled 2.2% and Australian shares <.AXJO> fell more than 1%. U.S. stock futures were also sharply lower, with S&P500 e-minis <ESc1> off nearly 1%.
"It's a very classic risk off," said Rob Carnell, Asia-Pacific chief economist at ING in Singapore.
"This is the Iranian response to the killing of Soleimani. We now have to see what the U.S. response to the Iranian response is. This looks as if it could escalate," he said.
"If you see U.S. treasuries rallying a bit this morning, expect them to rally quite a bit further should there be a forceful response from the United States, which I'd imagine there would be...from a market perspective I think this one could run and run."
The yield on benchmark 10-year U.S. Treasury notes <US10YT=RR> last stood at 1.7534%, down more than 7 basis points from a U.S. close of 1.825% on Tuesday, though up from session lows. U.S. 10-year Treasury futures <TYc1> had earlier peaked at their highest level since November, and were last up 0.63%.
The two-year yield <US2YT=RR> dropped to 1.4982% compared with a U.S. close of 1.546%.
The dollar slipped against the yen, with the Japanese currency touching its strongest point against the greenback since October. The U.S. currency was last down 0.28% against the yen at 108.11 <JPY=>.
The euro <EUR=> was relatively unmoved on the day, rising 0.04% to buy $1.1155. The dollar index <.DXY>, which measures the greenback against six major peers, was 0.19% lower at 96.819.
In commodity markets, global benchmark Brent crude futures <LCOc1> shot back above $70 per dollar to their highest level since mid-September, and were last up 3.59% at $70.72 per barrel. U.S. crude <CLc1> soared 3.46% to $64.87 a barrel.
The flight to safety and a falling dollar supported gold, which rocketed 1.80% on the spot market <XAU=> to $1,602.39 per ounce. [GOL/] "You can pretty much get the sentiment from gold. It is holding above $1,600, if there is confirmation that there are U.S. casualties, it could go higher," said Matt Simpson, a senior market analyst at Gain Capital in Singapore.
"If it does look like we've got U.S. casualties, then I don't think Trump is going to just stand back and take that," he said. "World War III has been thrown around. I don't think we're there yet. But it does look like Iraq II."
Reports of the attack threw the market off balance after better-than-expected data in the U.S. non-manufacturing sector helped to lift the dollar overnight. Markets in Asia had bounced on Tuesday amid easing anxiety over the possibility for further escalation in the Middle East.
(Reporting by Andrew Galbraith; Additional reporting by Tom Westbrook in Singapore; Editing by Shri Navaratnam)