Equities in Japan and South Korea slumped more than 4%, while the broader MSCI Asia Pacific Index dropped 2.4%, as investors reduced exposure due to concerns that higher crude oil prices will weigh on economic growth. US equity-index futures retreated about 0.6%, while contracts for Europe tumbled 1.6%.
Brent crude advanced 3.4% to trade above $116 per barrel, taking the year-to-date gains to 91%. Aluminum climbed as much as 6% after Iran attacked two production sites in the Middle East.
The moves came as additional US troops arrived in the Middle East, fanning fears of a risky ground attack on Iran. President Donald Trump is considering a military operation to extract nearly 1,000 pounds of uranium from Iran, according to the Wall Street Journal. However, Trump has not yet made a decision on whether to give the order.
“This escalation raises the odds that this war is going to last longer than investors were thinking and thus that oil prices will remain very high,” said Matt Maley, chief market strategist at Miller Tabak + Co. “We should expect more weakness in the markets.”
After weeks of resilience amid extreme volatility driven by turmoil in crude oil markets as the Strait of Hormuz remained closed, risk assets have begun to show signs of capitulation in recent sessions. Traders are also evaluating how prolonged elevated energy costs may affect global economic growth and whether they will force policymakers to keep interest rates higher for longer.
Meanwhile, Trump said the United States had good negotiations with Iran and that the Islamic Republic gave permission for 20 oil vessels to pass through the Strait of Hormuz. Trump expressed optimism about a potential deal with Iran, stating that it could happen soon.
Even so, Israel struck Tehran anew on Sunday, and Saudi Arabia intercepted almost a dozen drones, a day after Yemen-based Houthi militants entered the war.
Equity markets are feeling the strain, with the S&P 500 dropping 3.6% over Thursday and Friday, its worst two-day decline in a year, leaving the benchmark 8.8% below its January record. The Nasdaq 100’s two-day, 4.3% slide sent it into a 10% correction.
Treasuries rose on Monday, with the yield on the benchmark 10-year falling three basis points to 4.40%.
Some Wall Street bond-fund managers believe that markets are underestimating the risk that the US war in Iran will cause a sharp slowdown in an already sputtering economy. These managers, from firms like Pacific Investment Management, JPMorgan Chase & Co, and Columbia Threadneedle Investments, are preparing for an economic hit that will eventually trigger a bond-market rebound and cause yields to come sliding back down.
Economists have started to dial back their growth forecasts and increase the odds of a recession as higher energy prices, rising borrowing costs, and the stock-market slump start to squeeze businesses and consumers. Goldman Sachs Group said the probability of a downturn over the next 12 months has risen to about 30%, while Pimco sees a more than one-third chance.
Macquarie Group warned that oil may hit a record $200 per barrel if the Iran war drags on until June, with the Strait of Hormuz staying shut. A conflict that stretches through the second quarter would result in historically high real prices, according to analysts including Vikas Dwivedi. An alternative outlook, with a probability of 60%, suggested the war may finish at the end of this month.
In other market movements, gold dropped 0.8% to trade just around $4,450 per ounce, and a Bloomberg gauge of the dollar held its gains.
“Market behaviour reflects a clear shift towards capital preservation,” Wee Khoon Chong, a senior strategist at BNY in Hong Kong, wrote in a note to clients. “Recent outperformers are increasingly vulnerable to profit-taking and position unwinds. However, flows are unlikely to rotate meaningfully into fixed income,” given concerns over rising inflation pressures.