Financial markets were roiled on Wednesday after Iran fired missiles at US forces in Iraq, sending Asian stocks and US Treasury yields sliding and sharply lifting oil prices as investors feared a wider conflict in the Middle East.
Iran's missile attacks on the Ain Al-Asad airbase and another in Erbil, Iraq, early Wednesday came hours after the funeral of an Iranian commander whose killing in a US drone strike has intensified tensions in the region.
By late morning in Asia, however, equities had trimmed losses, the yen had stabilised somewhat and US bonds tempered their rally as investors paused for breath, and as a US official said the US was not aware of any casualties from the strikes.
"We are getting exaggerated moves but that's of course volatility playing. Markets simply hate uncertainty. It's an old adage but it definitely holds true in the current situation - markets can price risks but they can't price uncertainty," said James McGlew, executive director of corporate stockbroking at Argonaut in Perth.
US President Donald Trump said in a tweet late on Tuesday that an assessment of casualties and damage from the strikes was underway and that he would make a statement on Wednesday morning.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.47 percent around 0400 GMT, having dropped more than one percent earlier in the day. China's blue-chip CSI300 index was 0.48 percent lower.
Japan's Nikkei was down 1.2 percent, also paring earlier losses of over 2 percent, while Australian shares clawed back from a more-than-one-percent drop to shed just 0.14 percent. US S&P500 e-mini stock futures, which had earlier dropped nearly 1.7 percent, were down 0.26 percent.
Rob Carnell, Asia-Pacific chief economist at ING in Singapore, said possible further escalation of tensions between Iran and the US could still provoke a prolonged negative market reaction.
"If you see US treasuries rallying a bit this morning, expect them to rally quite a bit further should there be a forceful response from the US, which I'd imagine there would be... from a market perspective I think this one could run and run," he said.
The yield on benchmark 10-year US Treasury notes last stood at 1.7899 percent, down from a US close of 1.825 percent on Tuesday, but up from session lows. US 10-year Treasury futures had earlier peaked at their highest level since November, and were last up 0.24 percent.
The two-year yield fell to 1.5223 percent compared with a US close of 1.546 percent.
The yen, which had hit its strongest point against the greenback since October in morning trade, gave up nearly all its gains midday in Japan. The US currency was last down just 0.06 percent against the yen at 108.35.
The euro was up 0.03 percent to buy US$1.1154 and the dollar index, which measures the greenback against six major peers, was 0.10 percent lower at 96.909.
In commodity markets, global benchmark Brent crude futures shot back above US$70 per dollar to their highest level since mid-September, but were last up 1.61 percent at US$69.37 per barrel. US crude added 1.5 percent to US$63.64 a barrel.
Gold also fell below a key psychological level as initial fears eased. The precious metal was 1 percent higher on the spot market at US$1,590.21 per ounce, having earlier blasted through US$1,600. Analysts said markets will be closely watching for confirmation of any US casualties from Iran's strikes.
"If it does look like we've got US casualties, then I don't think Trump is going to just stand back and take that," said Matt Simpson, a senior market analyst at Gain Capital in Singapore. "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 US non-manufacturing sector helped to lift the dollar overnight.
The Institute for Supply Management said its non-manufacturing activity index rose to 55.0 last month from 53.9 in November, indicating a faster rate of expansion.
Shares on Wall Street had nonetheless fallen on Tuesday amid worries over US-Iran tensions. The Dow Jones Industrial Average fell 0.42 percent, the S&P 500 lost 0.28 percent and the Nasdaq Composite dropped 0.03 percent.
