Global shares have hit a two-month low after Israel's attack on Iran triggered a rush into safe haven bonds and gold, lifting Wall Street's "fear index" to its highest level since October.
Israel's attack on Iranian soil was the latest tit-for-tat exchange between the two arch foes, but losses in markets eased on Friday, sending oil and gold lower before Wall Street's open as Iran said it had no plans for an immediate retaliation, denying that any attack had taken place.
US stock index futures were down about 0.4 per cent, with no major data expected before the opening bell.
Safe haven currencies such as the yen and Swiss franc had initially rallied on news of the attack, but later pared their gains, with gold still on track for its fifth week of gains.
Oil prices had jumped $US3 a barrel on concern that Middle East oil supply could be disrupted, but later began moving lower as fears of a major escalation in Middle East hostilities eased.
US Treasuries rallied, pushing down yields on the benchmark 10-year bond to 4.5981 per cent.
The MSCI All Country stock index was down 0.38 per cent, hitting its weakest level since February but off the day's lows.
In Europe, the STOXX index of 600 leading companies was down 0.5 per cent, hitting its lowest level in over a month.
Markets are caught in the crosshairs of a "triple whammy" - a US Federal Reserve reluctant to cut interest rates, disappointing semiconductor earnings, such as at Taiwan's TSMC, and rising geopolitical risks.
Naka Matsuzawa, chief macro strategist at Nomura in Tokyo said the events in the Middle East exacerbated the trend of rising global inflation expectations.
"This is not just a Middle East thing that causes the risk off now. More fundamentally, it's the fading rate-cut expectations by the Fed, and on the back of it is higher inflation expectations, and this conflict...makes the thing worse basically," Matsuzawa said.
The CBOE Volatility Index, also known as Wall Street's 'fear gauge', hit its highest level since late October.
Investors are looking ahead to next week's key US first quarter economic growth figures, and the Fed's favoured measure of inflation, the core PCE deflator.
Hopes for a Fed rate cut as early as June have now been pushed back to later in the year, taking some wind out of the stock market.
Equity markets were already heading lower before the Middle East headlines as more robust US economic data spurred additional Fed officials to signal no rush to lower interest rates.
Chip-sector stocks were hit particularly hard by both the outlook for protracted tight monetary policy and investor disappointment at Taiwan Semiconductor Manufacturing Co's decision to leave capital spending plans unchanged.
The stock slumped as much as 6.6 per cent.
A day earlier, ASML, the largest supplier of equipment to computer chip makers, reported lacklustre new bookings.
MSCI's broadest index of Asia-Pacific shares was down 1.7 per cent, after earlier diving as much as 2.6 per cent.
The safe-haven yen rallied as much as 0.7 per cent against the dollar, but was last trading little changed on the day.
Gold also pared its gains for the day to edge lower, trading at $US2,375 an ounce, after last week's record high at $US2,431.29.
Brent futures surged as much as 4.2 per cent and were last trading down one per cent at $US86.29.
Iran is the third-largest oil producer of the Organisation of the Petroleum Exporting Countries, according to Reuters data.
Bitcoin was up two per cent at $US64,900.
Australian Associated Press
