Asian markets tumble as US-Iran fighting lifts oil and bond yields

By Gregor Stuart Hunter

SINGAPORE, Sept 2 (Reuters) - Stocks slumped at the start of the Asian trading session on Wednesday as a bond market-induced panic on global markets spilled over into the region, after renewed attacks by the U.S. on Iran pushed oil prices higher.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.8% in early trading as South Korea's KOSPI dropped 3% on the open and Japan's Nikkei 225 sank 2.2%. S&P 500 e-mini futures were flat.

Brent crude futures extended gains into a second day as trading resumed in Asia, rising 0.7% to $95.34 a barrel after the U.S. launched a barrage of airstrikes on Iran on Tuesday, which earlier pushed oil prices to a five-week high.

"The threat of further disruptions to the Strait of Hormuz has brought about renewed anxiety over inflation, driving a selloff in stocks across most major markets and a rout in global bond markets," Westpac analysts wrote.

The yield on the U.S. 10-year Treasury bond was up 0.4 basis point at 4.798% as the U.S. dollar index, which measures the greenback's strength against a basket of six currencies, held near the highest levels of the past two weeks at 99.67.

Overnight on Wall Street, the S&P 500 slipped 0.7% and the Nasdaq Composite fell 1% as a surge in government bond yields weighed on equities.

The declines came as data from the Institute for Supply Management released on Tuesday showed U.S. manufacturing activity moderated in August amid a slowdown in new orders, but remained in expansionary territory.

Traders believe that the Federal Reserve is likely to lift interest rates at its next meeting in two weeks, though a hike is not certain.

Fed funds futures are pricing an implied 67% probability of a 25-basis-point increase to benchmark borrowing costs at the U.S. central bank's two-day meeting ending on September 16, compared to a 39.6% chance a week ago, according to the CME Group's FedWatch tool.

Gold was flat at $4,328.59 an ounce, while bitcoin slipped 0.2% to $77,246.57 and ether was 0.3% lower at $2,412.60.

(Reporting by Gregor Stuart Hunter; Editing by Jamie Freed)