The situation in the Middle East escalated. Japanese and Korean stock markets closed down about 3%. U.S. stock futures continued their decline. Brent oil once rose above $115 and aluminum prices rose 5%.

# Long Yue, Yang Chen

Source: Wallstreetcn

Global markets were roiled by a confluence of factors: a sharp sell-off in U.S. equities last Friday, Iran’s rejection of a ceasefire proposal over the weekend, the entry of the Houthi movement into the conflict, and reports of U.S. military planning for ground operations and the seizure of enriched uranium. Brent crude rose 2.67%, exacerbating fears of persistent high inflation and prolonged elevated interest rates by central banks worldwide. Asian-Pacific stock markets closed broadly lower, with the Nikkei 225 down 2.8% and the KOSPI down 3%. U.S. stock futures extended losses, while safe-haven assets like the U.S. dollar advanced, and the Japanese yen broke below the 160 level against the dollar.

Amid concerns that the Middle East war would trigger a sharp economic slowdown, traders scaled back their rate-hike bets, and Brent crude briefly surged above $115 per barrel. Macquarie Group warned that if the Iran war drags on until June and the Strait of Hormuz remains closed, oil prices could hit an all-time high of $200 per barrel.

Meanwhile, Asian-Pacific stock markets closed broadly lower: the Nikkei 225 fell 2.8%, and the KOSPI dropped 3%. U.S. stock futures fell nearly 1% in early trading before turning positive in the afternoon, with Nasdaq 100 futures up 0.26% and S&P 500 futures up 0.25%.

The latest developments in the conflict have deepened market panic. According to Xinhua News Agency, Iran rejected the U.S.-proposed “15-point ceasefire plan,” with Iranian Parliament Speaker Mohammad Bagher Ghalibaf stating that Iran would never accept humiliation. Concurrently, Yemen’s Houthi movement formally entered the fray, launching its first ballistic missile attack on Israeli targets and threatening to block the Bab el-Mandeb Strait.

Furthermore, U.S. media reported that President Donald Trump is considering a high-risk military operation to seize Iran’s enriched uranium, as U.S. forces accelerate troop deployments to the Middle East. In an interview with British media on March 29, Trump said he wants to “take” Iran’s oil and did not rule out occupying Kharg Island, a key hub for Iran’s oil exports.

Jim Reid, Head of Macro Research and Thematic Strategy at Deutsche Bank, noted: “The market is clearly pricing in persistently high oil prices, which will have stagflationary effects on the global economy. The market’s main focus has shifted from inflation to economic growth.”

### Key Asset Performance

- U.S. stock futures turned positive in the afternoon: Nasdaq 100 futures +0.26%, S&P 500 futures +0.25%.

- Nikkei 225: -2.8% to 51,885.85 points; TOPIX: -2.9% to 3,542.34 points.

- KOSPI: -3% to 5,277.30 points.

- Pakistan KSE-100 Index: -4% to 145,663 points.

- Japan 30-year government bond yield: +8.0 bps to 3.780%.

- Brent crude futures: +2.67% to $108.13/bbl.

- Spot gold: +1.0% to $4,538.98/oz; spot silver: +1.5% to $70.84/oz.

- Aluminum prices: +5%.

- Bitcoin: fell to its lowest level in over three weeks, trading just below $67,000.

- U.S. dollar: rose for a fourth consecutive day, nearly flat on the day.

- USD/JPY: broke below 160, prompting Japan’s top currency official to issue a high-level intervention warning.

### Soaring Oil Prices and Inflation Fears

Extreme volatility in energy markets lies at the heart of the current market turmoil. With the Strait of Hormuz effectively blockaded for a month and the Houthis threatening to close the Bab el-Mandeb, global energy supply chains face unprecedented pressure. Kharg Island, one of Iran’s most critical oil export terminals, has also emerged as a potential military target, further amplifying oil price volatility.

In an interview with the Financial Times on March 29, Trump said he wants to “take oil” from Iran, as he did in Venezuela, and did not rule out occupying Kharg Island.

Macquarie Group warned in a report that if the Iran war drags into the second quarter and the Strait of Hormuz remains closed, oil prices could hit an all-time high of $200 per barrel. Analysts including Vikas Dwivedi noted a 40% probability of the conflict extending into Q2, which would push physical oil prices to record levels.

The surge in oil prices has directly fed into inflation expectations. Investors increasingly worry that persistently high energy costs will force central banks to keep interest rates elevated or even tighten policy further. According to Bloomberg, interest rate swap markets no longer price in Fed rate cuts for this year, with some investors preparing for a possible rate hike by year-end. This shift in expectations has triggered a sell-off in government bonds, pushing yields higher, with U.S. Treasuries on track for their worst monthly performance since October 2024.

### Global Equities Under Pressure

Hit by inflation fears and geopolitical risks, global stock markets have broadly declined. The S&P 500 fell 3.6% over Thursday and Friday, its largest two-day drop in a year, and is down 8.8% from its January record high. The Nasdaq 100 dropped 4.3% over the two days, entering a 10% correction zone.

U.S. stock futures fluctuated on Monday, falling 1% in early trading before turning positive, with Nasdaq 100 futures up 0.26% and S&P 500 futures up 0.25%.

Asian markets also suffered: the Nikkei 225 fell 2.8% to 51,885.85, the TOPIX dropped 2.9% to 3,542.34, and the KOSPI slid 3% to 5,277.30. Matt Maley, Chief Market Strategist at Miller Tabak + Co., said: “This escalation increases the likelihood that the war will last longer than investors expect, keeping oil prices at very high levels. We should expect more market weakness.”

### Rising Risk Aversion and Portfolio Shifts

Investors have shifted sharply to defensive positioning amid extreme volatility. The U.S. dollar, a preferred safe-haven during conflicts, rose for a fourth straight day and was nearly flat on the day. Aluminum prices rose 5%.

Spot gold gained 1.0% to $4,538.98 per ounce, while spot silver rose 1.5% to $70.84 per ounce.

Bitcoin fell to its lowest level in over three weeks, trading just below $67,000, signaling a retreat from risk assets.

Wee Khoon Chong, Senior Strategist at BNY Mellon in Hong Kong, wrote in a client note: “Market behavior reflects a clear bias toward capital preservation. Assets that have performed well recently are increasingly vulnerable to profit-taking and position unwinding.” He added that a large-scale shift to fixed income is unlikely amid concerns over rising inflationary pressures.

Traditional diversification strategies are also under strain. A typical global 60/40 portfolio tracked by Bloomberg has fallen 6.3% this month, its worst monthly performance since September 2022. Mark Malek, Chief Investment Officer at Muriel Siebert & Co., said that while weekend developments complicate the picture, Friday’s close felt like a “peak of pain” that could prompt some of the boldest traders to start looking for re-entry opportunities.

### Yen Breaks 160, Japan Issues “Bold Action” Warning

Against a backdrop of surging commodities and a stronger dollar, the yen fell below 160 per dollar ahead of the weekend—a level at which Japan intervened in 2024—prompting Japan’s top currency official to issue his strongest warning yet to speculators.

Atsushi Mimura, Japan’s Vice Minister of Finance for International Affairs, told reporters on Monday: “We are hearing growing concerns about increasing speculative activity not only in crude oil futures but also in the foreign exchange market. If this continues, we believe decisive action may be needed soon.”

Mimura emphasized: “We are prepared to respond on all fronts, and our focus is broad and comprehensive”—suggesting the government is monitoring both FX and crude oil futures speculation.

While Finance Minister Satsuki Katayama has repeatedly referenced possible “bold action” since late last year—a phrase widely interpreted as an intervention signal—Mimura had not used the term since taking office in July 2024. Analysts note that the top currency official’s use of this language is typically seen as a “final warning” before official intervention to support the yen.

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