Intensifying conflict in the Middle East and Iran's rejection of a ceasefire agreement have triggered a significant surge in global oil prices, placing downward pressure on stock markets worldwide. Concerns over accelerating inflation and an economic slowdown have escalated sharply.
During early Asian trading on Monday, Brent crude futures climbed more than 3%, surpassing $115 per barrel. U.S. West Texas Intermediate (WTI) crude futures also rose over 3%, reaching $102.97 per barrel. Macquarie Group warned that oil prices could reach a historic high of $200 per barrel if conflict with Iran persists into June and the Strait of Hormuz remains closed.
Concurrently, global equity markets faced widespread selling pressure. Asia-Pacific shares opened sharply lower, with South Korean stocks falling approximately 5%, Japan's Nikkei 225 index opening down 2.5%, and the MSCI Asia Pacific Index declining nearly 2%. U.S. stock index futures dropped almost 1%, extending the longest weekly losing streak since 2022 recorded on Wall Street last weekend.
Recent developments in the conflict have heightened market anxiety. Iran reportedly rejected a U.S.-proposed "15-point ceasefire agreement," with the Iranian parliament speaker stating they would never accept humiliation. Simultaneously, Yemen's Houthi forces formally entered the conflict, using ballistic missiles for the first time to strike Israeli targets and warning of a potential blockade of the Bab el-Mandeb strait. Additionally, recent U.S. media reports indicated that the U.S. President is considering a high-risk military operation aimed at seizing Iran's enriched uranium, while U.S. forces are accelerating deployments to the Middle East.
The extreme volatility in energy markets is central to the current turmoil. With the Strait of Hormuz effectively blocked for a month and the Houthis threatening the Bab el-Mandeb strait, global energy supply chains face unprecedented pressure. Kharg Island, one of Iran's most critical oil export terminals, has also become a potential military target, further amplifying risks to oil price stability.
Analysts at Macquarie Group Ltd. warned that a prolonged conflict with Iran extending into the second quarter, which they assign a 40% probability, could drive physical oil prices to record highs. The surge in oil prices is directly feeding into inflation expectations. Investors are increasingly concerned that persistently high energy costs will compel central banks to maintain high interest rates or even implement further monetary tightening. Interest rate swap markets no longer anticipate Federal Reserve rate cuts this year, with some investors beginning to price in the possibility of a rate hike before year-end. This shift in expectations has led to a sell-off in government bonds, pushing yields higher, with U.S. Treasuries heading for their worst monthly performance since October 2024.
Under the dual pressures of inflation concerns and geopolitical risks, global stock markets are under significant strain. The S&P 500 index fell 3.6% over last Thursday and Friday, marking its largest two-day decline in a year and pulling back 8.8% from its January record high. The Nasdaq 100 index dropped 4.3% over the same period, entering a correction territory of over 10%.
Asia-Pacific markets were similarly affected. In early Monday trading, Japan's Topix index fell 4.1%, and Australia's S&P/ASX 200 index declined 1.5%. A chief market strategist noted that the escalation increases the likelihood of the war lasting longer than investors initially expected, suggesting oil prices will remain elevated and forecasting further market weakness.
Confronted with extreme volatility, investor behavior has clearly shifted towards a defensive posture. The U.S. dollar, a preferred safe-haven asset during conflicts, advanced for a fifth consecutive day. Aluminum prices rose 5%. Conversely, Bitcoin fell to its lowest level in over three weeks, trading just below $66,000, indicating a retreat from riskier assets.
A senior strategist at BNY Mellon in Hong Kong commented that market activity reflects a clear preference for capital preservation. Assets that have performed well recently are becoming increasingly vulnerable to profit-taking and position unwinding. He also noted that due to worries about rising inflationary pressures, a large-scale shift of funds into fixed-income assets is unlikely.
Traditional diversification strategies are also being challenged. A typical globally diversified portfolio tracked by Bloomberg, consisting of 60% stocks and 40% fixed income, has fallen 6.3% this month, on track for its worst monthly performance since September 2022. A chief investment officer suggested that while weekend developments complicate the situation, Friday's market close felt like a potential "pain peak," which might encourage some of the boldest traders to start looking for re-entry opportunities.
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