Five areas to watch as renewed US-Iran hostilities rattle global markets

[SINGAPORE] Global markets are bracing for entrenched inflation and supply chain disruptions as a collapse of the US-Iran ceasefire forces investors to shift their focus from an artificial intelligence rally to geopolitics once more.

Following the downing of a US military helicopter on Tuesday (Jun 9), subsequent retaliatory strikes and the closure of the Strait of Hormuz again on Thursday morning, the threat of a prolonged conflict in the Middle East is triggering a broad reassessment of portfolios.

“What begins as a security issue can quickly become an inflation issue, a growth issue and ultimately an investment issue,” said Nigel Green, chief executive of financial advisory and wealth management firm deVere Group, on Wednesday.

As traders navigate the escalating hostilities, here are five key pressure points across global markets:

Oil: Potential surge to US$150 per barrel

Energy markets are absorbing the immediate shock, said Jorge Leon, senior vice-president and head of geopolitical analysis at Rystad Energy. He warned that a full resumption of hostilities could drive prices towards US$150 per barrel.

Brent crude futures rose nearly US$1.50 to US$94.58 a barrel as at 10.43 am in Singapore on Thursday after Iran declared the Strait of Hormuz shut once more. US West Texas Intermediate crude climbed US$1.71 to US$91.74.

However, the immediate price surge is being blunted by a record release of US oil reserves. Saudi Arabia is also exporting its crude oil through its Yanbu port, bypassing the Strait of Hormuz, added Leon.

Nevertheless, the price premium driven by fears surrounding the war is increasing, he warned.

Markets: Tech exhaustion and defensive pivot

Exhaustion in the tech sector is accelerating as the macroeconomic backdrop deteriorates, said Swissquote senior analyst Ipek Ozkardeskaya on Wednesday.

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Reflecting this broader market fatigue, the Nasdaq 100 closed nearly 2 per cent lower on Wednesday, led by large drops in heavyweights such as Nvidia, AMD and Micron.

Asset managers are actively pivoting away from sectors sensitive to energy shocks, noted Eastspring Investments. It flagged a strategic reduction in chemicals and materials holdings – sectors that are highly vulnerable to rising petrochemical input costs.

Capital is instead rotating into defensive, domestically oriented equities, including healthcare and consumer services. These offer more appealing entry points in less crowded market segments, added Eastspring.

In Singapore, the Straits Times Index inched up on Thursday after falling 1.3 per cent on Wednesday when hostilities resumed. Still, tech counters have continued to slide; CSE Global has fallen nearly 7 per cent in the past week, AEM is down about 8.1 per cent, while Frencken has dropped about 6.7 per cent.

Central banks: Return of the hawks

Energy-driven inflation is forcing central banks to abandon dovish guidance. The US headline consumer price index crossed the 4 per cent mark for May, effectively shattering expectations about near-term Federal Reserve rate cuts and reviving the possibility of an October hike.

In Asia, policymakers are acting defensively to stem capital flight. Bank Indonesia executed a surprise off-cycle 25-basis-point hike to 5.5 per cent on Tuesday. Meanwhile, the Bank of Japan faces mounting pressure to increase rates as early as June or July, driven by imported inflation from higher energy costs and persistent currency weakness.

For investors, this coordinated return to hawkishness effectively removes the safety net of imminent rate cuts that equity markets had been heavily pricing in.

Forex: Asian currencies feel the heat

Safe-haven flows and hawkish Fed pricing are keeping the US dollar strong, punishing regional currencies, noted DBS analysts on Thursday.

The Japanese yen remains under sustained downward pressure, as elevated oil prices boost demand for US dollars to meet higher energy import costs. Recent Ministry of Finance interventions near the 160 level are expected to be temporary unless oil prices materially decline, said DBS.

Elsewhere, South Korea has launched inspections into bank foreign-exchange (FX) trades – after the won plunged to a 17-year low on Saturday – to determine if there was improper trading that destabilised the FX market. DBS views this as a strong signal to curb speculative positions against the won. 

Meanwhile, the Indian rupee also remains heavily pressured despite intervention efforts by the Reserve Bank of India. It and other oil-sensitive currencies such as the Indonesian rupiah and the Thai baht may also be pressured lower if energy prices were to jump on renewed tensions, added DBS.

Gold: Volatility ahead

Gold, traditionally a geopolitical hedge, on Wednesday plunged over 4 per cent to a more than six-month low on Thursday. Spot gold was at about US$4,063 per ounce in the morning, after hitting its lowest level since Nov 21 overnight.

While the metal remains structurally supported by Middle East uncertainty, the prospect of prolonged high interest rates and structural US dollar strength diminishes the appeal of non-yielding assets, said Antonio Di Giacomo, senior market analyst at XS.com.

A stronger greenback could make gold more expensive for buyers using other currencies, reducing international demand, he added.

Volatility will likely dictate the metal’s trajectory until the Fed provides clearer guidance on its response to energy-driven inflation, noted Di Giacomo.