Asian shares slipped on Friday, erasing early gains, while gold shone and oil prices spiked after US air strikes in Iraq killed a top Iranian commander, heightening geopolitical tensions.
Iranian Major-General Qassem Soleimani, head of the elite Quds Force and top Iraqi militia commander Abu Mahdi al-Muhandis were killed early on Friday in a US air strike on their convoy at Baghdad airport, prompting Iran's Supreme Leader Ayatollah Ali Khamenei to vow harsh revenge.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS had touched its highest point since June 15, 2018 in early trade, but fell after reports of the air strike emerged. It was last down 0.16%.
European shares were set to follow their Asian counterparts lower. Pan-region Euro Stoxx 50 futures STXEc1 shed 0.66% to 3,757, German DAX futures FDXc1 were down 0.6% to 13,303.5 and FTSE futures FFIc1 gave up 0.42% to 7,514.
China's CSI300 index, one of the world's best-performing indexes last year, struggled to stay in positive territory but was last down about 0.2%. Australian shares finished up 0.64%, but off earlier highs.
"It remains very unclear exactly what impact (the US strikes) could have on the equity market," said Tapas Strickland, director of economics and markets at National Australia Bank.
"It is significant that one of Iran's top military generals was reported to have been taken out ... but it all hinges on what Iran does in terms of retaliation," he said.
Middle Eastern tensions upset a rally for the MSCI index, which finished at its highest close in more than 18 months on Thursday.
It had been lifted by a New Year's Day announcement from China's central bank that it would cut the amount of cash that banks must hold as reserves, releasing around 800 billion yuan ($114.87 billion).
Against the backdrop of a thaw in trade tensions between the United States and China, global markets had seen renewed appetite for risk assets.
"You have from both a policy and trade perspective a favorable framework for ... risk assets for the weeks to come," said Frank Benzimra, head of Asia equity strategy at Societe Generale in Hong Kong.
"The issue in our view, and that is the central scenario, is beyond these few weeks - where could we see a further correction?" he said, noting that the United States is unlikely to enjoy further fiscal stimulus before the presidential election in November.
Shares had received further support from data on Thursday showing factory activity in China continued to grow at a solid pace in December, and that business confidence improved.
Markets in Japan remain closed for a national holiday.
Overnight, Wall Street's major indexes notched record highs in their first session of the decade. The Dow Jones Industrial Average .DJI rose 1.16% to 28,868.8. The S&P 500 .SPX gained 0.84% to 3,257.85 and the Nasdaq Composite .IXIC added 1.33% to 9,092.19.
But US stock futures pointed to a grim day on Friday after the air strikes, with S&P e-minis ESc1 shedding 0.84%.
US Treasury futures also rose TYc1 reflecting an implied yield of 1.74%.
While equity markets turned lower, oil prices surged on news of Soleimani's death, which ramped up supply worries as the geopolitical situation deteriorated.
The global benchmark Brent crude LCOc1 shot 2.97% higher to $68.22 per barrel and US West Texas Intermediate crude CLc1 jumped 2.81% to $62.90 per barrel.
The strikes came after US Defense Secretary Mark Esper said on Thursday there were indications Iran or forces it backs may be planning additional attacks after Iranian-backed demonstrators hurled rocks at the US embassy in Baghdad.
In currency markets, the dollar weakened as investors snapped up safe-haven yen. The greenback fell 0.42% against the Japanese currency to 108.11 JPY=.
The dollar was little changed against the euro at $1.1167 EUR=.
The dollar index .DXY, which tracks the dollar against a basket of six major rivals, was down 0.04% at 96.808.
The US strikes in Iraq and recent dollar weakness combined to burnish the value of gold, driving the precious metal 0.84% higher on the spot market XAU= to $1,541.73 per ounce, around four-month highs. [GOL/]
($1 = 6.9642 Chinese yuan)