Middle East Conflict Sends Asian Markets Down, Oil Nears $100 Mark

Asian stock markets fell Friday as ongoing conflict involving Iran keeps oil prices hovering near $100 per barrel. The crisis is raising inflation concerns and reducing expectations for Federal Reserve interest rate cuts this year.

Financial markets across Asia tumbled Friday as the continuing Middle East conflict involving Iran pushed oil prices toward the critical $100 per barrel threshold, triggering concerns about inflation and economic stability worldwide.

The ongoing war between the United States and Israel against Iran has dramatically reduced investor optimism about a quick resolution, keeping energy costs elevated and casting uncertainty over global economic prospects. Asian markets are heading toward their second consecutive week of losses.

Investors have flocked to the U.S. dollar as their preferred safe investment during this period of instability, weakening other currencies in the process. The dollar has strengthened for two straight weeks and has climbed 2% since the conflict began in late February.

Energy prices stayed near the significant $100 benchmark on Friday, though they dropped slightly in morning trading after the United States granted a 30-day permit allowing nations to purchase Russian oil and petroleum products currently stuck at sea. Brent crude was trading at $99.85 per barrel, while West Texas Intermediate reached $95.05 per barrel.

Throughout Asia, the MSCI Asia-Pacific stock index declined 0.5%, positioning for a 1.5% weekly drop. Japan’s Nikkei index fell 1.3%, South Korean technology stocks plummeted nearly 2%, and Taiwan’s market decreased 1%.

Iran’s new Supreme Leader Mojtaba Khamenei has intensified military operations throughout the Middle East region and pledged to maintain the closure of the Strait of Hormuz shipping corridor, leading investors to prepare for an extended conflict and sustained high energy costs.

Rising inflation concerns have forced markets to quickly adjust their expectations for central bank policies this year. Traders now predict only 20 basis points of interest rate reductions from the Federal Reserve, down from the 50 basis points anticipated last month.

“Markets were positioned for Fed cuts this year but the runway to justify Fed cuts is no longer there with the U.S. excursion into Iran,” said Prashant Newnaha, senior rates strategist at TD Securities. “The markets are recalibrating for a higher terminal rate.”

The decline in global stocks and bonds shows no indication of stopping. U.S. markets dropped significantly overnight, and two-year Treasury yields, which typically follow Federal Reserve rate expectations, reached a six-month peak Thursday.

“With the possibility of higher oil prices still elevated, investors should be prepared for continued volatility and potentially further downside in the near term,” said Vasu Menon, managing director of investment strategy at OCBC in Singapore.

Jose Torres, senior economist at Interactive Brokers, explained that rising oil prices are negatively affecting corporate profit margins, inflation expectations, rate reduction possibilities, and bond yields, creating market instability with limited options for investors.

“Indeed, sinking optimism about Fed rate reductions amid strengthening cost pressures is weighing on traditional safe havens such as silver, gold, and government debt.”

The two-year Treasury note yield decreased 3 basis points to 3.730% after reaching its highest point since August 22 on Thursday. This yield has increased 35 basis points during the two weeks since the war commenced. The 30-year bond yield has risen 24 basis points this month.

Market attention will turn to multiple central bank policy meetings next week, with the Federal Reserve, Bank of Japan, European Central Bank, and Bank of England all scheduled to convene. Most are expected to maintain current interest rates unchanged, while the Reserve Bank of Australia is widely anticipated to raise rates.

In currency markets, the euro traded at $1.1527, showing slight daily gains but still heading for nearly a 1% weekly decline. The dollar index reached 99.599, positioned for a 0.8% weekly increase.

The Japanese yen strengthened slightly to 159.13 per dollar, remaining near the 160 level, though discussions about possible government intervention have been relatively quiet. Analysts noted that Tokyo’s threshold for intervention is higher due to the oil price crisis.

“What was once a ‘line in the sand’ at 160 has evolved into more of a moving goalpost,” said Tony Sycamore, market analyst at IG.

“Against such a hostile macro backdrop, it makes little sense for authorities to waste precious intervention ammunition—whether verbal or physical, trying to defend the 160ish level this time around.”

Gold prices increased 0.7% to $5,114 per ounce Friday but remained on track for a 1% weekly decline.