Asian stocks drop as Middle East tensions and rate concerns hit risk appetite

Geopolitical tensions and oil-driven inflation fears weigh on markets

Asian stocks declined as investors reacted to growing fears of an escalation in the U.S.-Israel war on Iran, following President Donald Trump’s ultimatum to Tehran. On Saturday evening, Trump issued a 48-hour deadline for Iran to reopen the Strait of Hormuz or face the “obliteration” of critical energy infrastructure. Iran responded by threatening to attack key energy and water infrastructure across the Middle East and to completely shut the Strait of Hormuz if Washington followed through on its threat.

The conflict has entered its fourth consecutive week, with reports early Monday indicating continued strikes in Iran and Israel and few signs of de-escalation. Persistent concerns that rising oil prices will fuel stickier global inflation and prompt more hawkish central bank policy added further pressure, with oil prices remaining upbeat in Asian trading.

Wall Street provided a weak lead-in, as U.S. markets marked four straight weeks of losses against the backdrop of the ongoing conflict. S&P 500 Futures were down 0.2% by 22:15 ET (02:15 GMT), underscoring soft risk sentiment heading into the Asian session.

Japan and South Korea lead regional declines

Japan and South Korea were the worst performers in Asia on Monday, with both markets seen as relatively more vulnerable to disruptions in global energy supplies, alongside India. Japan’s Nikkei 225 and TOPIX indexes fell between 2.8% and 3.5%. South Korea’s KOSPI tumbled nearly 5%, making it the sharpest decliner in the region.

South Korean assets also faced domestic monetary policy concerns. The market was pressured by expectations of a more hawkish Bank of Korea after the government nominated economist Shin Hyun-song as the new Governor of the central bank. In previous interviews, Shin has warned against excessive lending and inflation, and ING analysts described him as a hawkish appointment. They indicated that the Bank of Korea is now more likely to raise interest rates later this year.

Elsewhere in Asia, Hong Kong’s Hang Seng index slid 3.1%. China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indexes each lost about 2%. Australia’s ASX 200 fell 0.7%, while Singapore’s Straits Times index shed 1.8%. Futures for India’s Nifty 50 index declined 0.3%, reflecting concerns about potential energy supply disruptions.

FAQ

What triggered the latest sell-off in Asian stocks?
The sell-off was driven by escalating tensions in the Middle East, after President Donald Trump issued a 48-hour ultimatum to Iran over the Strait of Hormuz, and by concerns that higher oil prices will worsen inflation and keep central banks hawkish.

Which Asian markets were hit the hardest?
South Korea’s KOSPI was the worst performer, tumbling nearly 5%, while Japan’s Nikkei 225 and TOPIX fell between 2.8% and 3.5%. Hong Kong’s Hang Seng also posted a steep loss of 3.1%.

Why is South Korea facing additional pressure beyond geopolitical risks?
South Korea is under added pressure due to expectations of a more hawkish Bank of Korea after the nomination of Shin Hyun-song as the new Governor. His previously expressed concerns over excessive lending and inflation have led analysts at ING to expect a rate hike later this year.

How did U.S. markets influence Asian trading?
Asian markets followed a weak lead from Wall Street, where major U.S. indexes have posted four consecutive weeks of losses, and S&P 500 Futures were down 0.2% in early Monday trading, signaling subdued risk appetite.