Heightened tensions between the US and Iran, following a phone call between Israeli Prime Minister Benjamin Netanyahu and former US President Donald Trump discussing the potential for resuming military action against Iran, have rattled financial markets. Trump warned, "Time is running out for Iran. They'd better act fast, or they'll end up with nothing. There's no time to waste!"
On May 18th, Asia-Pacific stock markets opened broadly lower, with the MSCI Asia Pacific Index falling by 1%. South Korea's benchmark KOSPI index saw its intraday losses widen to 4.5%, bringing its cumulative decline over the past two trading sessions to over 10%. US stock futures also fell, extending the previous Friday's global market sell-off, with Nasdaq 100 futures down approximately 1%.
Spot gold fell more than 1%, breaching the $4,500 per ounce level.
Oil prices moved higher in response. Brent crude futures rose over 1% to around $110.50 per barrel, while US West Texas Intermediate (WTI) crude futures gained about 1.75% to $107.26 per barrel. Brent had already accumulated a near 8% gain last week.
Rising oil prices directly fuel inflation expectations, triggering a sell-off in global bonds and putting pressure on equities. This chain reaction is becoming a central driver of current market dynamics. Elias Haddad, Global Market Strategist at Brown Brothers Harriman, noted: "The potential for a Strait of Hormuz closure will remain a dominant market driver, as there is no clear resolution in sight while global oil inventory buffers are shrinking rapidly. Consequently, crude oil prices face further upside risks, which will simultaneously pressure global bond and equity markets."
**Asia-Pacific Stocks Broadly Lower, South Korea Triggers Circuit Breaker** Asia-Pacific markets bore the initial brunt. South Korea's KOSPI index saw losses widen to 4.5% at one point, marking a cumulative drop exceeding 10% over two days. The Korea Exchange triggered a circuit breaker after the KOSPI 200 futures index fell 5%, halting program trading for five minutes. Shares of Samsung Electronics initially fell before reversing to gain about 0.7%.
In Japan, the Nikkei 225 index fell approximately 0.65% to 61,008.80 points, while the Topix index was largely flat. Australia's S&P/ASX 200 index declined 0.76%. The MSCI Asia Pacific Index fell about 1%.
In Europe, Euro Stoxx 50 index futures dropped roughly 0.6%, and Germany's DAX index futures fell about 0.7%.
**US Stocks Showed Cracks Last Week; Focus Turns to NVIDIA Earnings** US markets had already shown significant weakness last Friday. The S&P 500 index fell 1.24% to close at 7,408.50 points; the Nasdaq Composite dropped 1.54% to 26,225.14 points; and the Dow Jones Industrial Average lost 537.29 points (down 1.07%) to close at 49,526.17 points.
Technology stocks were particularly hard hit. Intel fell over 6%, Advanced Micro Devices (AMD) dropped 5.7%, Micron Technology declined 6.6%, and NVIDIA slid 4.4%. Cerebras Systems, which had surged 68% on its Nasdaq debut last Thursday, gave back 10% on Friday.
On Monday, Nasdaq 100 futures were down about 1%, while S&P 500 futures fell approximately 0.5%.
Scott Ladner, Chief Investment Officer at Horizon Investments, commented: "The Iran conflict will eventually conclude, and commodity prices will retreat to pre-war levels. However, as the US earnings season winds down, investor focus is shifting back to the macro picture, which is currently dominated by higher interest rates—a persistent headwind for equities."
Market attention this week is highly focused on NVIDIA's earnings report and quarterly results from several major US retailers.
**High Oil Prices Fuel Inflation Fears, Bond Markets Face 'Rate Shock'** The persistent rise in oil prices primarily impacts inflation. Energy prices are a direct driver of inflation; the higher oil prices go, the more difficult it becomes for central banks to cut interest rates, potentially forcing them to hike—applying pressure to both stock and bond markets.
The yield on the US 10-year Treasury note edged higher to 4.61%. Japan's 10-year government bond yield rose about 10 basis points to 2.8%, and Australia's 10-year bond yield increased 4 basis points to 5.11%. Japan's 30-year bond yield climbed to 4% last week for the first time since 1999, while the US 30-year Treasury yield approached 5%, near a two-decade high.
Kyle Rodda, Senior Analyst at Capital.com in Melbourne, stated: "We are indeed in a 'mini rate shock.' Upside risks to rates will introduce uncertainty to the markets, but such volatility often works both ways." He added that equity markets could still see brief, tactical rebounds.
Market expectations for the Federal Reserve have also fundamentally shifted. Traders are now betting the Fed will raise interest rates by March of next year at the latest—a stark reversal from just before the conflict escalated in late February, when the market anticipated two 25-basis-point rate cuts in 2026. In just a few months, the interest rate narrative has completely flipped from "rate cuts" to "rate hikes."
Finance ministers from the Group of Seven (G7) nations are scheduled to meet this week, with the bond market sell-off expected to be a topic of discussion, though definitive measures to alleviate the pressure remain unclear.
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