Asian markets slumped on Tuesday, while oil prices climbed higher, as investors fret about the widening war in Iran and the Middle East.
US and Israeli attacks on the Islamic Republic have cut energy shipments through the Strait of Hormuz – about a fifth of global oil transits – creating fears of a new energy crisis that will ramp up inflation.
The biggest market impact was felt in Korea, where the KOSPI index fell by more than 7.2%, while the Nikkei in Tokyo was also down by 3.1%. In China, the Hang Seng Index in Hong Kong saw a 1.1% decline, while the Shanghai Composite slid by 1.4%.
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These moves were no surprise, given the potential for a prolonged blockade of the Strait of Hormuz, which is a key corridor for energy supplies to Japan, Korea, India and China – four of Asia’s biggest economies.
Analysts say market moves have been comparatively mild so far because there is still hope that the crisis might be limited to a few weeks and may not cause a major problem for the global economy.
But analysts warned that the longer it goes on, the more painful it would be as supply chains are hit and prices surge.
US President Donald Trump said the war, which began on Saturday (Feb 28) with a strike that killed Iran’s supreme leader Ayatollah Ali Khamenei, was going “substantially” ahead of schedule, although he warned that it could go on for more than four weeks.
And for the first time, he also laid out objectives – destroying Iran’s missiles, navy and nuclear programme, and stopping its support for armed groups across the region. Notably, they did not include toppling the Islamic Republic.
So far, there has been no end to hostilities in sight. The US embassy in Riyadh was hit by two drones, which caused a limited fire and some damage, according to a Reuters report which cited a Saudi defence ministry post on X.
The US State Department, meanwhile, urged Americans to leave all of the Middle East from Egypt, and heading east.
Threats ramping up oil prices
Iran has responded by unleashing missiles and drones across the Middle East, including at Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.
That fiery rhetoric sent oil prices soaring nearly 14% on Monday before slightly easing, while European natural gas prices spiked almost 40% after Qatar’s state-run energy firm said it had halted liquefied natural gas production.
Meanwhile, a general in Iran’s Revolutionary Guards threatened to “burn any ship” seeking to navigate the Strait of Hormuz.
“We will also attack oil pipelines and will not allow a single drop of oil to leave the region. Oil price will reach $200 in the coming days,” he warned.
Crude surged again on Tuesday, with Brent up more than 4% and back above $80 a barrel, and WTI climbing more than 3%.
India, which is one of four Asian giants dependent on oil and gas from the Middle East, said it has started to ration gas supplies to industries after production in Qatar was shut down, Reuters reported.
The Dutch TTF natural gas contract, considered the European benchmark, shot up more than 33%.
The rise in energy costs could give most central bankers a headache as they look to bring down inflation while also cutting interest rates to support their economies.
“A spike in energy prices creates a dilemma for central banks,” said Rodrigo Catril at National Australia Bank. “Stagflation makes central banks very uncomfortable, a longer-lasting energy shock is inflationary and at the same time it weakens growth.”
Chris Weston at Pepperstone added: “With the Strait of Hormuz temporarily constrained, the longer the disruption persists, the greater the risk that additional facilities and infrastructure across the Gulf region may be forced offline.”
Korean chip and airline stocks sink
Equity markets mostly retreated to extend Monday’s losses in most of Asia, while the dollar gained on a push into safe havens.
Seoul, which has surged more than 40% this year on the back of a tech rally, led the retreat by diving more than 7% as investors returned from a long weekend.
Chipmakers Samsung and SK Hynix, which have soared this year on the back of the AI tech rally, were at the forefront of the selling. Samsung sank 9.9% and SK Hynix 11.5%.
Kim Dae-jong, professor of business at Sejong University, told AFP: “South Korea is a highly export-dependent economy, and signs of a widening war in the Middle East have added to market uncertainty.
“The country also relies entirely on energy imports, … making some impact all but inevitable.”
Tokyo shed more than 3% while Hong Kong, Shanghai, Sydney, Wellington, Taipei and Jakarta were also sharply lower.
Europe also tumbled at the open, with London, Frankfurt and Paris off more than 1%.
Airlines were again among the biggest losers, with Tokyo-listed Japan Airlines down more than 6%, Cathay Pacific down 2.8% in Hong Kong and Qantas losing 1.8% in Sydney.
Air France-KLM shed 3% in Amsterdam.
“As long as oil flows continue, this remains a volatility event, not a systemic one – but it confirms that geopolitics is now structurally embedded in the investment cycle,” Monica Defend, at Amundi Investment Institute, said.
“In the short term, it feeds inflation risk, US dollar strength, and asset-class dispersion. Energy volatility, inflation uncertainty and regional dispersion are returning as defining market features.”
The dollar index, which measures the US currency against six others, held close to a six-week high at 99.07 as investors shunned those currencies they perceive to be most vulnerable to higher energy prices. The yield on the US 10-year Treasury note was up nearly 5 basis points at 4.1%, Reuters said.
With the dollar holding strong, gold was down 1.2% at $5,266 an ounce. Bitcoin fell 3.6% to $66,925.7.
Key figures at around 0815 GMT
West Texas Intermediate: UP 3.7% at $73.83 per barrel
Brent North Sea Crude: UP 4.3% at $81.06 per barrel
Tokyo – Nikkei 225: DOWN 3.1% at 56,279.05 (close)
Hong Kong – Hang Seng Index: DOWN 1.1% at 25,768.08 (close)
Shanghai – Composite: DOWN 1.4% at 4,122.68 (close)
London – FTSE 100: DOWN 1.3% at 10,641.69
Dollar/yen: DOWN at 157.29 yen from 157.31 yen
New York – Dow: DOWN 0.2% at 48,904.78 (close)
AFP with additional inputs and editing by Jim Pollard
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