As the firm confrontation between the United States and Iran escalates, with the potential for further conflict, selling pressure has intensified across stock markets, gold, and bond markets. The conflict has now entered its fourth week.
Asian equities plunged 3.7%, marking a third consecutive day of losses and edging closer to correction territory. Bond markets faced sell-offs amid concerns that a protracted conflict could fuel inflation, hinder economic growth, and compel central banks to consider raising interest rates. Futures contracts indicated the downward trend would likely spread to European and US markets. Gold plummeted 6%, erasing all its gains for the year and trading above $4,200 per ounce.
Tensions escalated over the weekend when US President Donald Trump issued a 48-hour ultimatum to Tehran, demanding it reopen the Strait of Hormuz—a critical waterway for oil and gas shipments from the Middle East—or face the "destruction" of Iranian power plants. Iran responded by stating that any such attack would prompt it to close the waterway indefinitely and target US and Israeli energy infrastructure in the region.
The stock market reaction was more pronounced, while the oil market's response to the latest escalation was relatively subdued. Brent crude edged higher with volatility during Asian trading, rising 0.9% to above $113 per barrel. Both Brent and West Texas Intermediate (WTI) crude have gained over 70% year-to-date. The US dollar strengthened for a second consecutive day.
"Markets are undoubtedly growing more nervous about the current situation in the Middle East," said Martin Schultz, Head of the International Equity Group at Federated Hermes. "We believe it is a time for caution, not panic. Duration is the key issue. The longer the conflict drags on, the worse the situation obviously becomes."
Global markets have already felt the impact of the conflict, with stocks and bonds experiencing simultaneous sell-offs last week as fears over inflation and an economic slowdown intensified. This has also put pressure on policymakers, with Federal Reserve Chair Jerome Powell stating that the central bank needs to see more progress on inflation before considering another interest rate cut.
According to Bloomberg strategists, "Asian markets started the week on a grim note, largely driven by a sharp repricing of the global monetary policy outlook. The rapid shift towards more hawkish interest rate expectations signals to investors that, even if oil prices stabilize, the energy shock stemming from the Iran conflict will lead to a significant tightening of financial conditions."
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