Stock markets fell and oil prices climbed Tuesday on growing fears of a wider war in the Middle East after Israel's army chief vowed a response to Iran's unprecedented attack on his country at the weekend.
The selling came after Wall Street's three main indexes tanked in response to forecast-beating US retail sales data that reinforced the view that the world's top economy remained in rude health and further dented hopes for interest rate cuts this year.
Traders were also digesting figures showing Chinese expansion easily beat expectations in the first three months of the year but retail and industrial data came in well below par, suggesting leaders have much work to do to kickstart growth.
All eyes are on the Middle East after Tehran fired hundreds of missiles and drones at its regional enemy, saying the attack was retaliation for an April 1 strike on the consular annex of its Damascus embassy that killed seven Revolutionary Guards including two generals.
While air defence systems destroyed the vast majority of the barrage and Iran said "the matter can be deemed concluded", Israel's army chief General Herzi Halevi sounded a note of warning, fuelling worries of a dangerous escalation.
"This launch of so many (Iranian) missiles, cruise missiles, and UAVs into the territory of the State of Israel will be met with a response," Halevi told troops at the Nevatim military base, which was hit in Iran's Saturday barrage.
However, he added that the military would not be distracted from its war against Hamas in Gaza.
Warren Patterson, at ING Groep, said the prospect of a response by Tel Aviv "means that this uncertainty and tension will linger for quite some time".
"The more escalation we see, the more likely we are to see oil supply from the region impacted."
Oil prices rose in Asian trade, having slipped Monday on hopes for a de-escalation following US calls for Israeli Prime Minister Benjamin Netanyahu to "take the win" and forgo a counterattack.
Hong Kong, Seoul, Taipei and Manila were all down more than two percent, while Tokyo shed 1.9 percent.
Shanghai, Sydney, Singapore and Jakarta sank more than one percent each, while there were also losses in Wellington and Mumbai.
London, Paris and Frankfurt were all down more than one percent at the open.
Investors appeared to ignore figures showing China's economy grew 5.3 percent in the first three months of the year, well above the 4.6 percent predicted in an AFP survey of analysts.
Other data reinforced worries about the outlook, with industrial production and retail sales coming in well below forecasts, ramping up worries about the prospects for the next quarter.
"While China's headline GDP figure offered a glimmer of optimism, the underlying weakness in domestic demand and industrial activity suggests that challenges persist," said SPI Asset Management's Stephen Innes.
"Investors remain cautious amid uncertainties surrounding the pace and sustainability of China's economic recovery."
The losses in Asia followed a big sell-off on Wall Street, which was dragged down by tech giants including Amazon, Apple and Alphabet.
That came after figures showed March retail sales beat expectations in yet another indication that the US economy remains strong despite two-decade-high interest rates.
The reading followed news that inflation came in above estimates for the third time in a row last month, while jobs creation was also much stronger than forecast, putting pressure on the Federal Reserve to hold off cutting interest rates.
Investors are now betting on just two reductions this year, compared with six pencilled in at the beginning of January.
And UBS has warned that borrowing costs could even go up if inflation is not brought under control.
"If the (economic) expansion remains resilient and inflation gets stuck at 2.5 percent or higher, there would be real risk the (Fed policy board) resumes raising rates again by early next year," said UBS strategists including Jonathan Pingle and Bhanu Baweja.
Meanwhile, San Francisco Fed boss Mary Daly said there was no rush to reduce rates just yet, adding that she wanted to be confident inflation was coming down to the bank's two percent target.
Treasuries hit new year-to-date highs Monday after the retail sales report.
With rates seen staying higher for longer, the dollar continued to strengthen, and briefly hit a new 34-year high of 154.61 yen, putting the focus on Japanese authorities amid speculation they will step in to support the currency.
Finance Minister Shunichi Suzuki said Tuesday that "we are closely monitoring the latest developments".
Tokyo - Nikkei 225: DOWN 1.9 percent at 38,471.20 (close)
Hong Kong - Hang Seng Index: DOWN 2.2 percent at 16,240.86
Shanghai - Composite: DOWN 1.7 percent at 3,007.07 (close)
London - FTSE 100: DOWN 1.3 percent at 7,862.15
West Texas Intermediate: UP 0.4 percent at $85.76 per barrel
Brent North Sea Crude: UP 0.4 percent at $90.44 per barrel
Dollar/yen: UP at 154.54 yen from 154.24 yen on Monday
Euro/dollar: DOWN at $1.0611 from $1.0626
Pound/dollar: DOWN at $1.2426 from $1.2449
New York - Dow: DOWN 0.7 percent at 37,735.11 (close)
