Asian markets faced pressure on Monday, driven by escalating Middle East tensions and an ongoing sell-off in technology stocks—leading to a surge in crude oil prices and sharp declines in South Korean equities, with the MSCI Asia Pacific Index nearing a technical correction.
In early Asian trading, South Korea's KOSPI index initially plunged more than 4% before paring losses to under 1%. Japanese markets were closed for a holiday, with government bond trading also suspended. Australia's S&P/ASX 200 edged up 0.3%. The MSCI Asia Pacific Index has now fallen more than 9% from its June peak, approaching the threshold for a technical correction, typically defined as a 10% decline from a recent high.
Brent crude futures jumped over 3.8% at one point, surpassing $91 per barrel to reach their highest level since June, while WTI crude rose about 2.3% to $84.41.
The oil price spike was triggered by a new round of hostilities between the US and Iran over the weekend. According to Iranian media reports, US forces conducted airstrikes on Qeshm Island in the Persian Gulf and the Iranian southern cities of Shadegan, Sirik, and Hajiabad. Separately, reports indicated a power and desalination facility in Kuwait was damaged in an attack attributed to Iran.
A macro strategist noted, "The risk backdrop in Asia continues to deteriorate. The tech sell-off, a strong US dollar, rising oil prices, and persistent geopolitical tensions all point towards a more defensive positioning."
Key Drivers of Market Volatility
The market turbulence is not driven by a single factor. Even before the Middle East escalation, the sell-off in technology stocks accelerated on Friday, with the Philadelphia Semiconductor Index officially entering bear market territory.
While Nasdaq 100 futures saw a minor 0.1% rebound on Monday, market sentiment remains fragile. A senior analyst commented that the Middle East escalation "will be keenly felt in Asian markets today." He added that further oil price gains threaten economic activity in "energy-import dependent regions," while the semiconductor stock decline is "triggering broad-based deleveraging globally."
Inflation Fears and Rate Hike Expectations
With oil prices up more than 20% this month, inflation concerns have reignited. Market focus is now on the upcoming July PMI data to gauge whether the US economy's resilience is sufficient to support potential Federal Reserve rate hikes in September or October.
A global markets strategist wrote, "If the July PMI data further confirms the relative strength of the US economy, the US dollar could find upward momentum this week." The US dollar index was largely flat on Monday.
Gold extended its decline from last week, with spot prices dipping slightly and briefly falling below a key level. Silver and platinum also declined. The rise in oil prices has reinforced expectations that "rates will stay higher for longer," dampening the safe-haven appeal of precious metals.
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