Gulf tensions spike oil, crush Asian shares, lift dollar yields
A sudden escalation in Gulf hostilities has sent oil prices sharply higher, triggering a broad equities selloff in Asia and reviving investor fears of further Federal Reserve tightening.
Asian equities slid on Monday as fighting intensified in the Gulf and Iran claimed to have closed the Strait of Hormuz. The geopolitical shock sent Brent crude climbing 4.1 per cent to $79.11 a barrel, while U.S. crude added 4.1 per cent to $74.37. U.S. officials noted about 20 vessels were escorted through the strait in the past 24 hours, though shipping data showed minimal traffic.
The sudden oil spike threatens to reverse recent progress on inflation just as markets brace for key U.S. price data on Tuesday. Two-year Treasury yields jumped to their highest level since early 2025 at 4.2393 per cent, while Fed fund futures priced in 39 basis points of policy tightening by year-end. The dollar index firmed to 101.13, supported by the higher yields ahead of Federal Reserve Chair Kevin Warsh's first congressional testimony on Tuesday.
The risk-off mood dragged Japan's Nikkei down 1.6 per cent and pushed MSCI's broadest index of Asia-Pacific shares outside Japan 0.9 per cent lower. European markets looked set to follow, with EUROSTOXX 50 and DAX futures both shedding 0.6 per cent. S&P 500 futures eased 0.4 per cent and Nasdaq futures lost 0.9 per cent ahead of earnings reports from major banks, Netflix and General Electric.
Chip bubble faces testing
South Korea's market bore the brunt of the selling, plummeting 5.4 per cent after an 8 per cent drop last week as leveraged semiconductor bets unwound. The sharp descent highlights growing fragility in the chip sector, despite SK Hynix's U.S.-listed shares having jumped 14 per cent in their Nasdaq debut on Friday. Adding to tech sector turbulence, Apple sued OpenAI and two former employees for trade secrets theft after markets closed.
Bank of America analysts warned the massive artificial intelligence capital expenditure cycle is destroying cash generation. Hyperscalers have spent $234 billion this year, pushing forward free cash flow into negative territory for the first time since at least 2007. "Against that backdrop, many overlooked areas offer materially better value," they cautioned.
Citi analysts struck a more bullish tone despite the turbulence. "While AI volatility may remain elevated over the coming quarter, we maintain our Overweight stance on global IT and the U.S.," they wrote, recommending pairing tech with cyclical sectors including Japanese financials and materials.
In currency markets, the dollar added 0.2 per cent against the yen to 162.03, recovering slightly from Friday when Japanese Finance Minister Satsuki Katayama suggested encouraging the $1.8 trillion GPIF pension fund to repatriate funds. Taylor Nugent, a senior economist at NAB, noted such a shift could trigger substantial yen buying, but added: "It is worth noting though that while allocations can theoretically be reviewed any time, they tend to be slow moving, and the FY26 investment plan is already in place."
The euro eased to $1.1394, weighed down by Europe's heavier reliance on foreign oil compared to the U.S. The pound slipped 0.2 per cent to $1.3379 ahead of an expected leadership transition in the UK. Meanwhile, rising yields dragged non-interest-bearing gold down 1.1 per cent to $4,076 an ounce.
