Asian markets plunged again on Monday, and oil prices rose, as tensions between the US and Iran escalated over a threat by Donald Trump.
On Saturday, the US President said Iran had 48 hours to reopen the Strait of Hormuz to shipping – or face the destruction of its energy infrastructure. Israel also said its war in the Middle East could last several more weeks.
Trump’s ultimatum, made a day after the US leader said he was considering “winding down” military operations, came as the waterway – through which 20% of global oil and gas flows – is largely closed, with only a handful of tankers allowed to transit to ‘friendly nations’.
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Trump wrote on Truth Social that the US would “hit and obliterate” Iranian power plants – “starting with the biggest one first” – if Tehran did not fully reopen the strait within 48 hours, or 23:44 GMT on Monday, according to the time of his post.
That led to Iranian leaders warning the Strait “would be completely closed” if the US acts on his threat.
IEA energy crisis warning
With the conflict now in its fourth week and showing no sign of ending, the head of the International Energy Agency warned of the worst global energy crisis in decades and said the world economy was under “major threat” from it.
Speaking in Australia on Monday, IEA boss Fatih Birol said: “The global economy is facing a major, major threat today, and I very much hope that this issue will be resolved as soon as possible.
“No country will be immune to the effects of this crisis if it continues to go in this direction. So there is a need for global efforts.”
Birol said the world was losing more oil each day than the combined impact of both oil shocks in the 1970s and Russia’s invasion of Ukraine.
His remarks came as central banks reconsider their monetary policies amid expectations that the surge in oil prices will send inflation soaring, with the Reserve Bank of Australia last week hiking interest rates.
Analysts have said the blockade in the Persian Gulf and Strait of Hormuz could also block shipments of fertiliser to nations across the Asia-Pacific, a concern that has also fanned concerns about global food security.
Iran’s Parliament speaker Mohammad Bagher Ghalibaf threatened to destroy vital infrastructure across the region, which he said would cause oil prices to rise “for a long time”, if Tehran’s own infrastructure was hit.
Speculation on US troops
Iranian media reported explosions in Tehran on Monday as Israel announced it launched another wave of strikes, while Saudi Arabia and the United Arab Emirates reported facing fresh attacks.
The latest escalation came as Israel’s military said it will expand ground operations in Lebanon against Iran-backed militant group Hezbollah, while a spokesman said the country faced “weeks” more fighting against Iran and Hezbollah.
There has also been speculation on what the US plans to do with 2,500 combat soldiers on their way to the region, with some suggesting they may be planning to seize Iran’s top oil export terminal.
“Military analysts have suggested that the US could be planning to capture Kharg Island, a slice of land about 21 square kilometres (8 square miles) in size that contains Iran’s primary oil export terminal. Doing so could, in theory, cut off the nation’s oil shipments, depriving the nation of much-needed revenue and forcing it to make greater concessions to the Americans in exchange for an end to hostilities,” the BBC reported on Sunday.
Big falls on key Asian markets
With news such as this, it’s no surprise that stock markets began to fall on Monday, starting with Seoul and Tokyo dropping by 6.5% and 3.5% respectively. These had been standout performers before the war started.
Hong Kong and Shanghai shed more than 3%, while Singapore, Taipei, Mumbai, Bangkok and Manila all lost between 2-3%. Sydney closed 0.74% down, while Wellington was also deep in negative territory.
London, Paris and Frankfurt also opened sharply lower.
South Korea’s won dropped to 1,510 won per dollar, its weakest level since 2009.
Oil prices jumped more than 2% with Brent above $114 and West Texas Intermediate topping $101.
‘Significant implications’
“The outcome and Trump’s next steps, particularly in the event of escalation, would have significant implications for markets through the remainder of the week and into month and quarter end,” wrote Pepperstone’s Chris Weston.
He added that while the president has often pulled back from the brink on issues in the past, Trump “has also shown credibility in following through with military action when demands are not met, so markets will place weight on his weekend post on Truth Social.”
“If we move past the deadline, focus will quickly shift to the scale of any action against Iran and the nature of Iran’s response, particularly toward US bases and its allies.”
The prospect of higher borrowing costs has hammered non-yielding gold, which has fallen for eight straight days and just suffered its worst weekly drop since 1983.
Bullion was sitting around $4,350 on Monday, having hit a record high of almost $5,600 at the end of January.
Key figures at around 0815 GMT
Tokyo – Nikkei 225: DOWN 3.5% at 51,515.49 (close).
Hong Kong – Hang Seng Index: DOWN 3.5% to 24,382.47 (close).
Shanghai – Composite: DOWN 3.6% at 3,813.28 (close).
London – FTSE 100: DOWN 1.5% at 9,773.76.
West Texas Intermediate: UP 3.5% at $101.64 per barrel.
Brent North Sea Crude: UP 1.7% at $114.11 per barrel.
Dollar/yen: UP at 159.58 yen from 159.30 yen.
New York – Dow: DOWN 1.0% at 45,577.47 (close).
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