Middle East Conflict Escalates Again, Global Markets Enter Indiscriminate Selloff Mode

The latest Middle East conflict has intensified market concerns over rising oil prices and fueled risk aversion sentiment.

On Monday (23rd), during the Asia-Pacific trading session, as the Middle East situation further dampened investor sentiment, markets from major Asia-Pacific stock indices to cryptocurrencies and gold entered a “downward spiral” again. Brent crude futures continued to decline, reaching $111.97 per barrel. WTI crude futures fell 0.6% to $97.64 per barrel. The spread between the two exceeded $14 per barrel, the largest gap in years between their benchmark prices. Chris Verrone, Chief Market Strategist at Strategas Research, said the widening spread could signal that “this oil crisis has peaked.” He also added that the high prices of Brent crude futures might lead traders to consider prolonging the conflict.

Fidelity Global Macro Director Jurrien Timmer posted on social media: “What does all this really mean? Why are risk assets falling, the dollar gaining, while bond yields and Bitcoin prices are rising? Too many questions.”

Japanese and Korean Markets Drop Over 5%

Today, the Nikkei 225 index briefly fell 5%, to 50,688.76 points; the Topix index dropped 4.5%, to 3,447.34 points, entering a technical correction. The electronics and banking sectors contributed most to the decline, with chip-related companies like Renesas Electronics and Lasertec experiencing the largest drops.

Amir Anvarzadeh, Japan equity strategist at Asymmetric Advisors, wrote in a report that regardless of what happens next, the short-term inflation outlook is very clear. U.S. President Trump issued a 48-hour final ultimatum to Iran, demanding the reopening of the Strait of Hormuz, which undoubtedly “escalates tensions” and increases the likelihood of conflict. He expects that overvalued AI-related stocks like Fujikura Ltd., a cable manufacturer, will be severely impacted by inflation concerns. Fujikura’s stock price fell as much as 6.7% on Monday.

Kazuyuki Muramatsu, Head of Investment Management at Nagomi Capital, said that rising Japanese bond yields further heightened caution in the stock market. On Monday, the 10-year Japanese government bond yield rose 6 basis points to 2.32%, approaching the highest level since 1999. “The market views the rise in yields as ‘negative’,” Muramatsu said, “so even for bank stocks that typically benefit from rising yields, this is a bearish factor.”

Major Korean stock indices also declined about 5%. The KOSPI composite index plunged over 6%, and the KOSDAQ small-cap index fell nearly 5%. The Australian S&P/ASX 200 index dropped more than 1.8% in early Asian trading.

U.S. banks say the recent sell-off in the Nikkei 225 could mark a short-term bottom, as volatility surged significantly—a pattern historically associated with market lows. However, whether this will translate into a sustained recovery depends on how quickly macroeconomic uncertainties subside. A key trigger for a rebound could be stabilization in energy markets. Rising gasoline prices, especially with the US summer driving season approaching, may influence policy responses and investor sentiment. If energy costs continue to climb due to supply disruptions related to the Strait of Hormuz, global market pressure could persist.

“As a non-resource-based economy, Japan remains particularly vulnerable. A long-term disruption of the Strait of Hormuz would not only affect oil flows but also impact broader commodities including liquefied natural gas, coal, and industrial metals, increasing input costs across sectors,” the bank said. “If geopolitical tensions ease in the coming weeks, Japanese stocks could resume a long-term upward trend supported by solid corporate fundamentals, stable earnings revisions, and continued foreign investment. However, if tensions persist, volatility could re-emerge, potentially pushing markets below recent lows.”

U.S. stock futures showed little change. Dow futures were flat, S&P 500 futures down 0.1%, and Nasdaq futures down 0.2%. All three major indices declined last week, with the S&P 500 dropping over 1.5%, falling below its 200-day moving average for the first time since May. The Dow experienced its first four-week losing streak since 2023, with the Nasdaq also falling about 2% during the same period.

U.S. investors still hope that the Trump administration will shift its hardline stance on Iran, reigniting the so-called “TACO” trade. Craig Shapiro, senior macro strategist at NinjaTrader, said, “The market is digesting ‘TACO,’ considering it almost certain and imminent.” He added that the historic ‘pain point’ for the S&P 500, a 10% correction from its recent high, has not yet been reached. Since the conflict escalated, the S&P 500 has fallen more than 5%, but underlying factors still support its upward trend.

Bonds and Gold as Safe Havens Also Decline

In past geopolitical tensions, investors flocked to gold as a safe haven, pushing prices higher. However, this time, gold—long regarded as the premier safe asset—has also failed to escape the current conflict’s impact.

Dow Jones Market Data shows that last week, the main gold futures contract fell $486.80 per ounce, or 9.6%, to $4,574.90 per ounce, marking the worst weekly performance in 14 years. During the Asia-Pacific trading session today, spot gold continued to decline 1.7% to around $4,413 per ounce, and gold futures dropped 3.5% to $4,448.46 per ounce. Other precious metals also weakened on Monday. Spot silver fell 0.4% to around $67 per ounce, and spot platinum declined 0.6% to $1,913.57 per ounce.

Similarly, U.S. Treasuries as a safe haven are also under pressure. The 10-year U.S. Treasury yield has risen to 4.39%, a notable increase since early this month. Mark Hackett, chief market strategist at Nationwide Investment Management, said investors are not flocking into U.S. Treasuries as usual; instead, the yield movement indicates concerns over inflation impacts and rising U.S. debt. This also suggests market worries that if rising oil prices push up consumer prices, the Federal Reserve may need to hike interest rates to curb a new round of inflation.

Gold’s performance remains perplexing. Fawad Razaqzada, market analyst at StoneX, said, “The reason might be that, compared to safe-haven flows supporting gold, the strengthening dollar and rising U.S. bond yields are exerting a greater drag on gold prices. Even if gold ultimately outperforms, the short-term shock from soaring oil prices is too strong for gold to ignore.”

Historically, gold tends to perform well during geopolitical conflicts. But Razaqzada emphasized, “Similar to U.S. Treasuries, investors are currently conflicted. If the conflict persists long-term, central banks may need to raise interest rates to combat inflation triggered by rising oil prices, which could weaken gold relative to currencies like the dollar.” Last week, the European Central Bank and Bank of England hinted at possible rate hikes this year. The Federal Reserve has not signaled clearly, but markets are gradually lowering expectations of rate cuts within the year.

Most importantly, analysts believe that investors find it hard to ignore the significant rise in gold prices over the past year. Gold prices increased over 60% from the end of 2022 into early 2023, with the rally continuing into early 2024. Liz Thomas, chief investment strategist at SoFi, said, “From late last year to early this year, gold has started to look more like a speculative asset. The current situation is as if all previously outperforming assets are being punished for their past success. When investors become fearful, they tend to sell those assets that performed well before, and gold is one of them.”

(This article is from First Financial)