Persistent conflict in the Middle East, coupled with surging oil prices sparking inflation concerns, placed global financial markets under pressure on Tuesday. Asia-Pacific equities declined during the session, U.S. Treasury yields remained elevated, and demand for safe-haven assets like gold strengthened.
On Tuesday, Asia-Pacific stock markets fell across the board. The MSCI Asia Pacific Index dropped as much as 2% during the day, while Japan's Nikkei 225 Index fell over 2%. U.S. stock futures also moved lower, with S&P 500 Index futures declining 0.7%.
South Korea's KOSPI Index, returning to trade after a long holiday, led the declines, falling more than 4% at one point.
Despite heightened short-term market volatility, Timothy Moe, Chief Asia Pacific Equity Strategist at Goldman Sachs, stated in a media interview that while the Middle East situation could act as a catalyst for a "long-overdue technical adjustment" in markets, strategically, it presents an opportunity to position in Asian assets, as the region's fundamentals remain constructive. Moe commented:
"We see many favorable factors in this region, and based on available information, we see no reason to alter our positive strategic outlook on Asian equities."
Ongoing strikes by the U.S. and Israel against Iran, alongside threats from Iran to blockade the Strait of Hormuz, have driven a sharp rise in oil prices, boosting inflation expectations. Traders have now pushed back expectations for the Federal Reserve's first interest rate cut to September, with expectations for a third cut in 2026 nearly vanishing. This repricing of interest rate prospects is pressuring both stock and bond markets. After surging approximately 7% on Monday, Brent crude oil extended gains on Tuesday, approaching yesterday's high near $79.57 per barrel.
A Goldman Sachs trader cited historical data indicating that following the 22 instances since 2000 where WTI crude oil posted single-day gains exceeding 10%, the S&P 500 Index's performance, after an initial decline, has typically turned positive. However, the sharp climb in energy prices has raised market concerns about the inflation outlook. The yield on the 10-year U.S. Treasury note remained near the previous session's level of 4.04%. Australia's 10-year government bond yield jumped significantly by 10 basis points to 4.73% in early Tuesday trading, while Japan's 5-year government bond yield also rose more than 5 basis points to 1.585%.
Reserve Bank of Australia Governor Michele Bullock stated that the central bank is "highly alert" to the potential impact of Middle East conflicts on inflation expectations and is prepared to enact policy responses if necessary. According to analysis by Bloomberg strategist Mark Cranfield, bonds in Australia, Japan, and South Korea are all declining, with the overall situation in Asia's fixed income market appearing more severe than suggested by the overnight moves in U.S. Treasuries. Against the backdrop of declining risk appetite, demand for safe-haven assets has notably increased. Gold prices rose 0.7% on Tuesday to approximately $5,360 per ounce; silver prices advanced 0.4%, trading around $90 per ounce.