Equity markets in Asia resumed a downward trajectory on Tuesday as investors assessed the economic fallout from recent strikes on Iran. MSCI's broadest index of Asia-Pacific shares outside Japan fell 1% to extend losses for a second session, with Korea's market leading declines after dropping 2.5%. Japan's Nikkei 225 also moved lower, sliding 0.8%.
Futures tied to U.S. equities indicated softer sentiment in early trade, with S&P 500 e-mini contracts down about 0.2%. The moves followed a volatile session on Wall Street the previous day in which the S&P 500 recovered from an early slump to finish flat and the Nasdaq Composite rose 0.4% as dip buyers entered after fighting spread beyond Lebanon.
Market participants are factoring in geopolitical risk on top of already elevated policy uncertainty. "Economic policy uncertainty was already elevated and now with the Iran conflict, the geopolitical risk is expected to rise too," said Rupal Agarwal, Asia quant strategist at Bernstein in Singapore. Agarwal noted that simultaneous spikes in policy and geopolitical uncertainty were last observed in 2022 amid the Russia-Ukraine conflict, which proved disruptive for Asian markets.
Tensions intensified when an official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz is closed to marine traffic and that Iran would fire on any ship attempting to pass, a statement that amplified concerns about potential interruptions to international energy shipments.
Energy markets reacted sharply. Brent crude futures jumped as much as 13% to $82.37 a barrel, a peak not seen since January 2025, before settling up 7.1% at $78.07 a barrel. In turn, benchmark European and Asian liquefied natural gas prices rose by around 40% on Monday, highlighting acute supply concerns in gas markets.
The surge in oil and gas prices adds complexity to the Federal Reserve's efforts to keep inflation on a downward path. Policymakers had already been wrestling with how gains from artificial intelligence and other factors are affecting the U.S. economy, and the energy price spike introduces an additional inflationary impulse.
Recent ISM manufacturing data released on Monday showed that activity in the sector expanded steadily in February. However, the report also registered a jump in a factory-gate price gauge to a near 3-1/2-year high, a sign of upside pressure on prices even before the recent rise in oil prompted further worries.
Market-implied odds from the CME Group's FedWatch tool indicate a 97.5% probability that the Federal Reserve will keep policy rates unchanged at its next two-day meeting on March 18. The likelihood of the Fed holding in June, which had been below 50% previously, ticked higher on Monday and is now slightly above a coin toss.
Safe-haven demand supported the U.S. dollar, with the dollar index - which tracks the greenback against six major currencies - holding near a six-week high at 98.494. U.S. Treasury yields were mixed: the 10-year note yield fell 1.9 basis points to 4.0288%.
Precious metals and digital assets posted small moves. Gold inched up about 0.2% to $5,336.99. Bitcoin slipped roughly 0.1% to $69,348.85 while ether gained 0.3% to $2,050.50.
Market takeaway - The combination of elevated policy uncertainty and renewed geopolitical risk is reverberating through equities, energy, bond markets and currencies. Traders are weighing the near-term inflationary consequences of a sharp energy price shock against signs of steady manufacturing activity and a U.S. central bank that is largely priced to pause in March.