Asian equities tumbled on Wednesday while oil prices edged higher after a renewed escalation in hostilities between Iran and the United States, raising geopolitical uncertainty and intensifying market focus on upcoming U.S. inflation data that could influence interest rate expectations.
The latest confrontation followed claims by Iran’s Revolutionary Guards that they had launched attacks on a U.S. base in Jordan and 21 other targets in the Gulf. Iranian media reported the strikes as retaliation for U.S. military action near the Strait of Hormuz, a critical global energy shipping route. The U.S. military, posting on X, said it had responded by targeting Iranian air defence systems, ground control stations and surveillance radar sites near the strait. President Donald Trump stated that the response followed the reported downing of a U.S. Apache helicopter on Tuesday.
Financial markets reacted sharply to the developments. MSCI’s broadest index of Asia-Pacific shares outside Japan fell about 3%, while Japan’s Nikkei dropped 2%. South Korea’s KOSPI declined nearly 7% in a volatile session marked by renewed pressure on technology and artificial intelligence-related stocks. European futures were largely flat, with investors awaiting further clarity on the regional and economic implications of the escalating conflict.
Oil markets showed a more restrained but upward reaction. Brent crude futures rose 0.7% to $92.08 a barrel, while U.S. West Texas Intermediate crude gained 0.6% to $88.73. Prices moved away from seven-week lows recorded in the previous session, reflecting continued sensitivity to developments in the Gulf region and potential disruptions to shipping routes.
Charu Chanana, chief investment strategist at Saxo in Singapore, said markets were currently treating geopolitical developments as short-term headline risk rather than a sustained macroeconomic shock. She noted that oil prices holding near $90 a barrel suggested investors were not yet pricing in a prolonged supply disruption, though she warned that escalation involving energy infrastructure or shipping lanes could trigger a sharper repricing.
In the United States, equity futures also declined, with S&P 500 futures down 0.5% and Nasdaq futures falling 0.86%, as earlier optimism from a tech rebound faded amid concerns over valuations, geopolitical tensions, and expectations of tighter monetary policy. Investors were also positioning ahead of U.S. inflation data scheduled for release later on Wednesday, with economists surveyed by Reuters expecting annual inflation to rise 4.2% in May, the highest level since April 2023.
Market expectations for Federal Reserve policy have shifted in response to stronger economic data and rising energy prices. A recent jobs report increased bets that the Fed may need to raise interest rates later this year. Traders are now fully pricing in a 25-basis-point rate hike in December, reversing earlier expectations of potential rate cuts.
Chanana said a stronger-than-expected inflation reading could further constrain the Federal Reserve’s messaging, noting that policymakers would struggle to ease guidance if inflation pressures persist alongside rising oil prices. She added that while the Fed may be unable to respond aggressively to a supply-driven shock, it cannot ignore inflation expectations if energy costs continue to climb.
Currency markets reflected continued dollar strength, with the euro trading at $1.1548 and sterling at $1.3380. The Japanese yen held near 160.36 per dollar, a level widely seen by traders as a potential trigger for government intervention.
In Japan, wholesale inflation accelerated in May at its fastest pace in three years, reflecting broader price pressures linked to the conflict and higher input costs. The data strengthened expectations that the Bank of Japan could raise interest rates at its June 16 policy meeting, with markets nearly fully pricing in a move. Analysts said persistent yen weakness and diverging policy expectations between the Fed and BOJ could accelerate Japan’s tightening cycle.
Elsewhere in emerging markets, Bank Indonesia surprised investors with an off-cycle interest rate increase aimed at stabilising the rupiah, underscoring growing pressure on developing economies facing volatile capital flows and inflation risks.
Gold prices also fell sharply, sliding to an 11-week low and last trading at $4,174.20, down 2% on the day, as investors moved away from safe-haven assets amid shifting market expectations for interest rates and inflation.
