Asian stock markets plunged at Monday’s open, with oil prices briefly hitting five-month highs, as investors reacted to a dramatic escalation in the Middle East crisis after the United States joined Israel in attacking Iran’s nuclear facilities.
The direct US involvement has ignited fears of significant disruption to global energy markets and the potential for a wider regional conflict, sending a wave of risk aversion through financial markets, with Indian benchmarks like the Sensex poised for a sharp decline.
The trading week began under the heavy shadow of military escalation.
The news that the US had participated in strikes on Iranian nuclear sites immediately spooked investors, who are now anxiously awaiting Tehran’s retaliation.
Iran, the world’s ninth-biggest oil producer with an output of about 3.3 million barrels per day, has threatened US bases in the Middle East, amplifying fears of an expanding conflict in the volatile region.
The market reaction was swift.
In Asia, Tokyo’s key Nikkei index was down 0.6%, while Seoul fell 1.4%, and Sydney was 0.7% lower. MSCI’s broadest index of Asia-Pacific shares outside Japan also fell 0.5%.
Early indicators for European markets pointed to a similar negative start, with EUROSTOXX 50 futures losing 0.7%, FTSE futures falling 0.5%, and DAX futures slipping 0.7%.
Even US share markets, despite showing some resilience, saw S&P 500 futures fall a moderate 0.5% and Nasdaq futures dip 0.6%.
Oil market on edge: the Strait of Hormuz in focus
The most immediate and significant market impact was seen in oil prices, which were up over 2 percent, reaching their highest levels since January.
Brent crude rose a relatively restrained 2.7% to $79.12 a barrel, while US crude climbed 2.8% to $75.98.
Market participants now fear that if Tehran decides to retaliate, one of its most powerful options would be to attempt a closure of the strategic Strait of Hormuz.
This narrow waterway, only about 33 km (21 miles) wide at its narrowest point, is a critical chokepoint for global energy, carrying one-fifth of the world’s oil output and 20 percent of its liquefied natural gas supplies.
While Tehran has threatened to close the strait in the past without following through, the direct US action has changed the calculus.
Following the strikes, Iran’s Press TV reported that the Iranian parliament had approved a measure to close the strait, raising the stakes considerably.
“Selective disruptions that scare off oil tankers make more sense than closing the Strait of Hormuz given Iran’s oil exports would be shut down too,” Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia, told Reuters.
“In a scenario where Iran selectively disrupts shipping through the Strait of Hormuz, we see Brent oil reaching at least $100/bbl,” he added.
Indian markets brace for impact: Sensex set for sharp drop
Benchmark Indian indices, the Sensex and Nifty, are set for a significant fall at the open on Monday, June 23, as the escalating tensions in the Middle East rattled global markets.
The US strike on three Iranian nuclear facilities has reignited fears of a wider conflict, and with Iran’s parliament now backing the closure of the Strait of Hormuz, the risk of a fresh spike in crude prices is a major concern for the Indian economy.
The Gift Nifty futures, as of 8:10 am IST, were trading at 25,015, indicating a lower opening compared to the previous close of 25,112.4.
This comes after Indian benchmark indexes rose about 1.6% last week, driven by gains in financial sector stocks, which had provided some cushion against geopolitical tensions.
In the previous session on June 20, the frontline indices had snapped a three-day losing streak as broad-based buying sent them rallying over one percent.
On that day, foreign portfolio investors (FPIs) were strong buyers, purchasing Indian equities worth Rs 7,940 crore, while domestic institutional investors (DIIs) were net sellers of shares worth Rs 3,049 crore.
A cautious flight to safety?
Interestingly, there was no immediate, pronounced rush into the traditional safety of US Treasuries, with 10-year yields actually rising 2 basis points to 4.397 percent.
In commodity markets, gold, another safe haven, edged down 0.1% to $3,363 an ounce.
In currency markets, the US dollar, often sought in times of crisis, edged up 0.3% on the Japanese yen to 146.48 yen, while the euro dipped 0.3% to $1.1481.
The dollar index firmed 0.17% to 99.078.
Some optimists are hoping that Tehran may back down now that its nuclear ambitions have been curtailed, or even that the crisis might lead to regime change and a less hostile government.
However, analysts at JPMorgan cautioned that historical episodes of regime change in the region have typically resulted in oil prices spiking by as much as 76 percent, with an average rise of 30 percent over time, highlighting the significant risks that lie ahead.
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