Stocks sold off and crude oil climbed as tensions in the Middle East intensified, with Iran-backed Houthi forces entering the conflict and an expanded US military presence raising concerns about a prolonged confrontation. Bonds advanced.
Equities in Japan and South Korea slumped more than 3%, while the broader MSCI Asia Pacific Index dropped 2.4%, as investors cut exposure on concern that higher crude oil prices will weigh on economic growth. US equity-index futures retreated about 0.5%, while contracts for Europe tumbled 1.4%.
Brent crude advanced 2.7% to trade above $115 a barrel, bringing year-to-date gains to about 90% as the conflict broadened in its fifth week. Aluminum climbed as much as 6% after Iran attacked two production sites in the Middle East.
The moves came as additional US troops arrived in the Middle East, fanning fears of a risky ground attack on Iran. President Donald Trump is weighing a military operation to extract uranium from Iran, the Wall Street Journal reported. Trump hasn't made a decision on whether to give the order, it said.
ALSO READ: Trump Says He Wants To 'Take The Oil' In Iran, Eyes Kharg Island
“Markets spent a month pricing a short, contained conflict,” said Hebe Chen, senior market analyst at Vantage Global Prime. “That wishful optimism has now broken with the Houthis' entry over the weekend. The playbook is being rewritten from this week as prolonged war risk becomes increasingly credible.”
After weeks of resilience amid extreme volatility driven by turmoil in crude oil markets as the Strait of Hormuz remained closed, risk assets have begun to show signs of capitulation in recent sessions. Traders are also gauging how prolonged elevated energy costs may affect global economic growth and whether they will force policymakers to keep interest rates higher for longer.
Meanwhile, Trump said the US had good negotiations with Iran and the Islamic Republic gave permission for 20 oil vessels to pass through the Strait of Hormuz. Trump said he does see a deal with Iran and that could be soon.
Even so, Israel struck Tehran anew Sunday and Saudi Arabia intercepted almost a dozen drones, a day after Yemen-based Houthi militants entered the war.
“Claims from the US are almost always denied by the Iranian side, which says no such discussions are taking place,” Yugo Tsuboi, chief strategist at Daiwa Securities, said on Trump's latest remarks. “It would be more reassuring if there were clearer confirmation from Iran that it's indeed engaging in negotiations with the United States.”
The conflicting comments are adding to the strain in the equity markets. The 3.4% drop in the S&P 500 over Thursday and Friday was its worst two-day decline in a year, leaving the benchmark more than 8% below its January record. The Nasdaq 100's two-day, slide sent it into a 10% correction.
In other corners of the market, gold dropped 0.5% to trade around $4,470 an ounce. A Bloomberg gauge of the dollar strengthened for a fifth day, while Bitcoin traded around $66,600. The yen rose versus its Group-of-10 currency peers after Japan's currency chief Atsushi Mimura said the nation may take bold action in the foreign-exchange market if current situation continues.
Treasuries rose on Monday, with the yield on the benchmark 10-year falling three basis points to 4.40%. Some Wall Street bond-fund managers say markets are underestimating the risk that the US war in Iran will cause a sharp slowdown in an already sputtering economy.
At companies including Pacific Investment Management Co., JPMorgan Chase & Co. and Columbia Threadneedle Investments money managers are preparing instead for an economic hit that will eventually trigger a bond-market rebound and cause yields to come sliding back down.
Economists have started to dial back their growth forecasts and nudge up the odds of a recession as higher energy prices, rising borrowing costs and the stock-market slump start to squeeze businesses and consumers. Goldman Sachs Group Inc. said the probability of a downturn over the next 12 months has risen to about 30%, while Pimco sees a more than one-third chance.
Oil may hit a record $200 a barrel if the Iran war drags on until June, with the Strait of Hormuz staying shut, Macquarie Group Ltd. warned. A conflict that stretches through the second quarter would result in historically high real prices, analysts including Vikas Dwivedi said in a note, outlining a scenario with odds of 40%. An alternative outlook, with a probability of 60%, suggested the war may finish at the end of this month, they said.
“Market behavior reflects a clear shift toward capital preservation,” Wee Khoon Chong, a senior strategist at BNY in Hong Kong, wrote in a note to clients. “Recent outperformers are increasingly vulnerable to profit-taking and position unwinds. However, flows are unlikely to rotate meaningfully into fixed income,” given concerns over rising inflation pressures, he wrote.
Some of the main moves in markets:
Stocks
- S&P 500 futures fell 0.5% as of 10:54 a.m. Tokyo time
- Japan's Topix fell 3.9%
- Australia's S&P/ASX 200 fell 1.2%
- Hong Kong's Hang Seng fell 1.7%
- The Shanghai Composite fell 1%
- Euro Stoxx 50 futures fell 1.5%
Currencies
- The Bloomberg Dollar Spot Index was little changed
- The euro was little changed at $1.1505
- The Japanese yen rose 0.2% to 159.95 per dollar
- The offshore yuan was little changed at 6.9256 per dollar
Cryptocurrencies
- Bitcoin was little changed at $66,560.95
- Ether rose 0.3% to $2,008.2
Bonds
- The yield on 10-year Treasuries declined three basis points to 4.40%
- Japan's 10-year yield declined two basis points to 2.365%
- Australia's 10-year yield declined two basis points to 5.08%
Commodities
- West Texas Intermediate crude rose 2.3% to $101.96 a barrel
- Spot gold fell 0.7% to $4,462.63 an ounce
ALSO READ: Brent Crude Surges To $116 As Middle East Conflict Worsens With Houthi Attacks On Israel
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
