Stock losses worsen, oil advances on Iran conflict

The MSCI Asia Pacific Index dropped as much as 2.5%, causing the worst two-day slump since April.

• Stocks and bonds drop amid Iran's Middle East attacks escalation
• Oil prices surged, fueling inflation and rate cut concerns
• Gold rose on haven demand as investors pared risk

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Stock losses deepened and bonds got sold off as Iran stepped up its attacks on the US and its allies in the Middle East, pushing oil prices higher and fueling inflation concerns. Gold added to its gains on haven demand.

The MSCI Asia Pacific Index dropped as much as 2.5%, causing the worst two-day slump since April. South Korea’s Kospi Index — the world’s second-best-performing stock market this year — plunged as much as 6.4% as the country returned after a long weekend. Equity-index futures for the US and Europe also fell, signaling more losses are in store.

Investors remained focused on oil with the commodity extending gains as the US and Israel stepped up their war against Iran, while Tehran threatened a full closure of the Strait of Hormuz — a crucial waterway for the movement of crude. Brent rose close to $80 a barrel after spiking more than 7% on Monday. The rising oil prices stoked concerns about the outlook for global bonds, with traders from Sydney to Tokyo offloading government debt.

Concerns about higher inflation have prompted traders to pare back bets on interest-rate cuts by the Federal Reserve, with a first US rate cut fully priced in September and expectations for a third reduction in 2026 fading. That shift comes on top of richly valued global equity markets already unsettled by the billions companies are pouring into artificial intelligence and concerns over the technology’s disruptive impact.

“My guess is that markets traded as though the conflict would be relatively short last night. However, that view might be too optimistic,” said Nick Ferres, chief investment officer of Vantage Point Asset Management in Singapore. “Prior to the conflict, markets were already concerned about the sustainability of AI capex, disruption and how it was financed.”

The critical question for markets is duration — whether this proves to be a brief spike in risk premium or a prolonged shock that starts to weigh on capex and hiring decisions, said Ana Isabel Gonzalez Encinas, group chief investment officer at Farringdon Asset Management.

As US-Israeli strikes on Iran reverberated across the Middle East, President Donald Trump insisted there was no fixed timeline, while Defense Secretary Pete Hegseth rejected the idea of an “endless” war with Iran.

Secretary of State Marco Rubio said “the hardest hits are yet to come from the US military.” The next phase will be even more punishing on Iran than it is right now, he added.

“Trump has escalated the narrative around Iran by saying ‘Whatever it takes,’” said Anna Wu, cross-asset investment strategist at Van Eck Associates Corp. in Sydney. “This prolongs volatility shocks.”

Meanwhile, the US embassy in the Saudi capital, Riyadh, came under attack by two drones as Iran stepped up strikes on the kingdom in retaliation against the US and Israel.

As investors pared risk, haven assets drew fresh demand. Gold rose 0.7% to about $5,360 an ounce and silver climbed 0.3% to trade close to $90 an ounce. The Bloomberg Dollar Spot Index held its gains from the prior session, when it advanced 0.7%.

“This is now a pricing event rather than just headline risk,” said Oriano Lizza, a sales trader at CMC Markets Singapore. “Sentiment is negative, as we are seeing clients taking solace in safe-haven assets like gold.”

The Iran war is also rekindling inflation concerns across financial markets, sapping the outlook for global bonds that had just posted their best start to a year since the pandemic.

Traders from Sydney to Tokyo have offloaded government debt since Monday as they game-plan how a prolonged conflict in the Middle East may ramp up oil and supercharge inflation. Those concerns are eroding the haven appeal of fixed-income assets, with government bonds from the US, Japan, Australia, New Zealand and South Korea all posting losses this week.

“I was surprised and still am with how well markets have taken the conflict,” said Nick Twidale, chief markets analyst at AT Global Markets. “But I feel if it pushes past another few days we could see downside moves accelerate.”