(Bloomberg) — Stocks fell and crude oil surged as an escalation in the Middle East conflict hit markets, prompting investors to trim risk exposure and seek haven assets.
Asian shares fell 1.2%, while equity-index futures for US benchmarks dropped 0.6%, recovering from earlier session lows. Brent surged as much as 13% — before paring gains — as the conflict plunged the global crude market into turmoil, with the effective closure of the Strait of Hormuz.
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Some of the steepest moves retraced as President Donald Trump told the New York Times that he was open to dropping sanctions on Iran if its new leader was pragmatic. Iran also made a fresh push to resume talks with the US, the Wall Street Journal reported.
All eyes are on the status of the Strait of Hormuz, which is crucial for the flow of oil to the rest of the world. As investors shunned risk, some haven assets got a bid. Gold rose 0.9% to trade around $5,325 an ounce, off the session highs. But, the dollar pared its advance and Treasuries erased earlier gains.
“Markets are pricing a limited conflict, with broader investment implications still manageable unless escalation proves prolonged,” Adam Hetts, Global Head of Multi-Asset at Janus Henderson, wrote in a note. “As always, diversification and a long‑term perspective matter most when uncertainty peaks.”
Shaken by fresh anxieties over artificial intelligence and potential cracks in credit, all while trading at historically high valuations, stock markets must now contend with the spiraling military action in Iran and the broader region that threatens to destabilize global shipping and limit travel. The impact on oil and inflation is of paramount concern in markets that last month saw US stocks post their worst drop since April.
Bloomberg Economics said that if the Strait of Hormuz is closed, then it could trigger a spike as high as $108. About one-fifth of global oil flows pass through the waterway, making it a critical energy choke point.
Read: Iran Strikes Lift Asian Energy, Defense Stocks; Airlines Drop
Digital signals indicate that oil-tanker traffic through Hormuz has nearly halted, and three ships were attacked near the mouth of the Persian Gulf, heightening fears that supplies could tighten.
“History tells us that geopolitical shocks tend to produce sharp initial moves in oil and safe havens that often fade relatively quickly if the conflict proves contained,” said Josh Gilbert, market analyst at eToro Ltd. “Until there are clear signals of de-escalation, investors should expect elevated volatility across oil, gold, currencies, and equities throughout the week ahead.”
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What Bloomberg strategists say …
We have very big jumps in energy prices, as expected, but most other moves are relatively contained and almost everything has pared back from the opening extremes. There is no broad markets panic yet.
— Mark Cudmore, MLIV Executive Editor. For full analysis, click here.
Strategists at Barclays Plc warned against quickly buying any dip. Investors have grown accustomed to geopolitical flare-ups that fade fast, but this episode risks lasting longer, wrote Ajay Rajadhyaksha, the firm’s global chairman of research, citing the potential for US casualties, strikes on Iranian leadership and disruption to Hormuz traffic.
“The risk-reward doesn’t seem compelling,” he said. “If equities pull back enough (say over 10% in the S&P 500), there is likely to come a time to buy. But not yet.”
Geopolitical risks are adding a new layer of concern for markets after the disruptive potential of AI roiled stocks across sectors for weeks in the US, in what’s become known as the “AI scare trade.” Issues related to private credit — a key funding source for technology companies — have also weighed. Even before Monday’s jump in oil prices, data on Friday showed a hotter-than-estimated reading on US producer prices.
WATCH: Bloomberg Intelligence’s Mike McGlone explains what the US and Israeli strikes on Iran mean for oil and commodities prices.Source: Bloomberg
Any long-lasting oil price spike would also muddy the case for Treasuries. While a flight to safety in markets would cause yields to fall, higher energy prices that feed through the economy and stoke inflation drive them higher.
“Even without a formal closure of the Strait of Hormuz, the reality is that vessels rerouting and sharply higher insurance premiums effectively tighten supply conditions,” said Dilin Wu, a strategist at Pepperstone. “That alone embeds a fresh inflationary impulse into the global economy.”
The possibility of prolonged turmoil in the Middle East and the ripple effects of higher oil prices are giving money managers fresh reasons to sell equities and shift into safety. Rich valuations across global equities and credit also make it easier for investors to trim risk.
“This is all coming at a fragile time as investors are becoming more cautious,” said Dec Mullarkey, managing director at SLC Management. “US equity markets are already very sensitive to threats of technology disruption and emerging credit stress, so the prospects of higher commodity prices could force a selloff as investors rein in risk.”
Some of the main moves in markets:
Stocks
S&P 500 futures fell 0.6% as of 10:28 a.m. Tokyo time
Japan’s Topix fell 1.2%
Australia’s S&P/ASX 200 fell 0.6%
Hong Kong’s Hang Seng fell 1.2%
The Shanghai Composite fell 0.3%
Euro Stoxx 50 futures fell 1.3%
Currencies
The Bloomberg Dollar Spot Index rose 0.2%
The euro fell 0.2% to $1.1783
The Japanese yen fell 0.3% to 156.45 per dollar
The offshore yuan was little changed at 6.8683 per dollar
Cryptocurrencies
Bitcoin rose 1.5% to $66,630.66
Ether rose 2.1% to $1,969.54
Bonds
The yield on 10-year Treasuries advanced three basis points to 3.96%
Japan’s 10-year yield declined two basis points to 2.090%
Australia’s 10-year yield declined one basis point to 4.64%
Commodities
West Texas Intermediate crude rose 4.7% to $70.16 a barrel
Spot gold rose 0.9% to $5,324.94 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Carmeli Argana, Matthew Burgess, Natalia Kniazhevich, Sid Verma and Muyao Shen.
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