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Asian shares experienced a decline on Friday as investors navigated through significant fluctuations in bond and currency markets, leading up to crucial US jobs data. The volatility was primarily centered around the bond markets, where the benchmark 10-year US Treasury yields reached an all-time high of 5.34% after experiencing the largest quarterly increase in 32 years. However, they later settled at 5.2512% in Asia, showing relative stability.

Meanwhile, the fiscal concerns in France caused the spread between French and German sovereign bond yields to exceed 140 basis points, the widest gap since 2012. This development unsettled European stocks and adversely affected the euro, which plummeted to $1.1215, the lowest level since May 2025. It also depreciated against the yen and the Swiss franc.

MSCI's broadest index of Asia-Pacific shares outside Japan experienced a 0.5% decline and was poised for a weekly drop of 1.7%. Japan's Nikkei index fell by 0.7%, but it was projected to rise by 3.1% for the week. Meanwhile, mainland Chinese markets were closed for a public holiday through the following Wednesday.

Nasdaq futures increased by 0.3%, while S&P 500 futures rose by 0.1% following the dip in Treasury yields, which assisted in Wall Street's late rebound. All attention was now focused on the US nonfarm payrolls report scheduled for later in the day. Forecasts anticipated a rise of 90,000 jobs in September, with the employment rate expected to remain steady at 4.1%.

Chris Weston, head of research at Pepperstone, emphasized that the Federal Reserve's current preoccupation with inflation and price pressures made a robust wages print particularly impactful for US rates, Treasuries, and the USD. Risk assets had largely accommodated the rise in US real yields, even when they performed exceptionally well. However, a persistent surge in term premium could potentially prove to be a more significant challenge.

The probability of the Fed raising interest rates again in October stood at 25%, down significantly from 69% a week earlier after two top policymakers expressed a more cautious approach, waiting for additional data before determining their next move on interest rates. Nonetheless, a rate hike in December was still fully priced in.

Dovish remarks from Fed officials triggered a substantial rally in 2-year Treasuries overnight, with the yield curve steepening as short-end yields fell. The 2-year yield was up by 1 basis point (bp) at 4.8039%, having dropped 10 bps the previous day. The 10-year Treasury yield surged 2 bps to 5.2575%, after declining 6 bps overnight, relieving from a 24-year peak of 5.3445% due to the intense sell-off which lured some investors back into the market.

The turbulence in European bonds, particularly with French yields hitting 14-year highs, may have facilitated the return of safe-haven flows to US Treasuries, the dollar, and the Swiss franc. The US dollar index, which measures the currency's performance against six peers such as the euro and franc, remained strong at 102.09 on Friday, having risen 0.6% overnight to reach the highest level since April 2025.

It is expected to continue its three-week streak of gains, up 1.1%. The euro weakened to $1.1235, falling 0.8% overnight. It also declined against the yen and the franc, dropping 0.8% and 1%, respectively. The yen traded at 158.13 per dollar after Japan's data revealed underlying inflation in the country's capital accelerating to an annual rate of 2.7%, reinforcing the argument for further interest rate hikes.

Oil prices maintained firmness on Friday after surging overnight, with the US reportedly sending more troops and carriers to the Middle East. China had also halted oil product exports, raising concerns about possible global fuel shortages. US West Texas Intermediate crude futures were steady at $92.84 a barrel, after ending up nearly 3% the previous day. The contract for Brent crude futures persisted above $102 a barrel.