Instant view: Oil, Japan's yen up on reports Israeli missiles hit Iran

(Reuters) - Oil and gold prices rose and Japan's yen rallied on Friday on reports Israeli missiles have hit a site in Iran.

Israel has struck Iran, three people familiar with the matter said, as Iranian state media reported early on Friday that its forces had destroyed Israeli drones, days after Iran launched a retaliatory drone strike on Israel.

The Israeli military had no comment on the reports. Reuters could not immediately confirm the reports.

Israel had said it was going to retaliate against Iran after the latter's April 13 missile and drone attack.

Market reaction: [US/] [MKTS/GLOB] [O/R]

QUOTES:

PRASHANT NEWNAHA, SENIOR ASIA-PACIFIC RATES STRATEGIST, TD SECURITIES, SINGAPORE

"Markets clearly caught offside heading into the weekend. Attention has pivoted away from inflation to renewed concerns that the Middle East conflict could re-escalate. This is driving a strong flight to quality bid."

"Given the market has no sense of how long or deep this conflict could play out, there is no compelling argument to hold significant risk positions over the weekend. Risk assets are likely to remain on the backfoot."

SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO

"The rise in commodity prices and the dollar is going to weigh on Japanese imports. Given the geopolitical risks and the rise in volatility in EM currencies, the BOJ (Bank of Japan) is going to stay on pause in April. They will be cautious about the situation, as well as currency volatility."

VASU MENON, MANAGING DIRECTOR, INVESTMENT STRATEGY, OCBC, SINGAPORE

"This latest explosion is of significance because Iran’s army air base and Isfahan’s airport are reportedly close to the explosion site. If the Israelis are indeed behind the latest explosion, or if the Iranian think they are behind it, then markets will wait to see what happens next because the Iranian have said that while they are prepared to de-escalate if Israel does not strike back, their response will be quick and aggressive if Israel does attack Iran.

"The lack of clarity on whether Israel is behind the latest explosion and what Iran might do next will keep investors nervous and market volatile for now, at a time when investors are faced with significant inflation and interest rate uncertainties as well."

NAKA MATSUZAWA, CHIEF MACRO STRATEGIST, NOMURA, TOKYO

"It only exacerbates the trend of global inflation expectations now going higher. 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.

"This is a typical risk-off trade for every market now, so I am not surprised the yen is bought on the back of this. (Recently) there was a huge outflow from Japanese investors into foreign equities... that's now being repatriated I think, and there's also a lot of yen speculative positions that have build up and particularly when FX volatility rises, that's when they have to unwind positions globally."

MOH SIONG SIM, CURRENCY STRATEGIST, BANK OF SINGAPORE, SINGAPORE

"It's pretty obvious market is nervous ... I think right now we don't really have the details. It really depends on how calibrated the attacks are. So I think markets are at this stage in a flight to safety mode ... right now, we're still in a situation where we know something has happened. But we need to understand the degree of the degree of retaliation."

DAMIEN BOEY, CHIEF MACRO STRATEGIST, BARRENJOEY, SYDNEY

"I think what's happening in the Middle East is making that upward inflection point with global inflation all the more real.

"Today equities are down and bonds are up ... Look, that makes sense from a risk perspective, but I still think that bonds and equities are more or less still correlated. To me, until we resolve this uncertainty about global inflation, actually bonds and equities will move together. So there's not a lot of diversification. What I'd much rather be doing is looking at a third alternative asset class, which of course would be commodities. Commodities have been a very unloved source of diversification. Now what you're starting to see is that no matter whether interest rates in the U.S. go up or down, gold prices are just going up and that's telling you that there's a rush to the exits to get out of the things which are moving too closely together, like bonds and stocks and maybe credit.

"Gold prices have risen despite the stronger U.S. dollar. So what happens when the U.S. dollar eventually goes down? What you'll find is that the U.S. dollar will probably be too expensive and need to come down, in which case gold could get another leg up."

KHOON GOH, HEAD OF ASIA RESEARCH, ANZ, SINGAPORE

"Markets have definitely reacted very, very swiftly to the news reports. We've seen a massive risk-off move with gold rallying, oil prices rallying, and traditional risk assets getting sold out hard. I guess markets at this stage will want to get greater clarity and confirmation over the extent of the attack, and I think more importantly, any response from Iran ...

"Markets will be very worried that this is the start of a tit-for-tat escalation which could create huge volatility in the Middle East."

CHRISTOPHER WONG, CURRENCY STRATEGIST, OCBC, SINGAPORE

"It's a big dampener on risk assets, including equities and most currencies.

"While policymakers in the region and the U.S. have collectively taken a more proactive stance to calm FX markets, the re-emergence of geopolitical shocks may unnerve sentiments. Safe-haven proxies including gold, dollar, Swiss franc, and yen may see further demand in the interim."

CHARU CHANANA, HEAD OF CURRENCY STRATEGY, SAXO, SINGAPORE

"A triple whammy of sorts for the markets, as Fed’s hawkishness keeps taking a leg up with each passing day and semiconductor earnings have so far fallen short to counter that risk off.

"To top it off, geopolitical risks have escalated again with Israel’s strikes on Iran, and risk sentiment could remain weak as we await more details on damages and casualties, and fears of an Iran response are also likely to underpin."

(Reporting by Asia markets team; Editing by Jacqueline Wong and Mrigank Dhaniwala)