- Asian markets fall as Middle East conflict escalates.
- South Korea's KOSPI drops over 7% during trading.
- Japan's Nikkei 225 briefly falls below 55,000.
- Oil-driven inflation fears trigger global risk-off sentiment.
Equity markets in Asia moved downward on Wednesday after the build up of conflict in the Middle East caused a wave of risk avoidance, which crashed the major indices of Japan and South Korea, and drove investors to less risky securities as long-term oil price shocks were feared. The Nikkei 225 of Japan fell by over 3 percent in intraday trade and at one time, it actually dropped to below 55,000 points.
The South Korea yardstick index KOSPI index had even greater losses falling more than 7 percent at one point of the session. The sharp fall, as documented by Reuters data and market reports, was triggered by a general selloff in the technology and semiconductor stocks as investors re-examined the growth prospects in the world and how inflationary the rising energy prices associated with the Iran conflict would be. Losses incurred in the KOSPI led to a stop of trading in the programs in a temporary manner because automated trading limits were exceeded, which reflects how strongly the market responded.
The index has already gone into the correction zone, as it has dropped by over 10 percent since its recent high of February 26. Stocks of key chipmakers in South Korea was one of the largest market dragons. Both Semiconductor giants Samsung Electronics and SK Hynix fell sharply, erasing approximately $170 billion worth of combined market capitalization at the beginning of the week.
The equity market in South Korea had been among the most robust over the last few months in the region, owing to the excitement around artificial intelligence-driven demand of memory chips. The KOSPI had shot up by almost 50% at its peak at the beginning of the year due to anticipation of more global investments in AI infrastructure.
Market Repricing
Market repricing is on the driving force of the energy shock. They said the abrupt rise in the Iran conflict and the subsequent rise in oil prices is compelling investors to review risk exposure in global equities. Rising crude prices have been a worry that inflation pressures might rise once again, which may postpone monetary policy by the Federal Reserve of the U.S and other central banks. Increased energy prices also have a direct threat to the growth in economies that are dependent on imports like Japan and South Korea.
According to Dave Mazza, chief executive of Roundhill Investments, the selloff is a product of increased global positioning and not a inherent weakness of South Korea. This seems to be more of unwinding of positions than a breakdown in South Korean specific fundamentals. The biggest and the most liquid indices will minimize risk rapidly when global risk appetite changes and when there are substantial energy and foreign exchange volatility increases, he said.
The currency markets have been following suit of the equity turbulence. On Tuesday, South Korean won declined by more than 4 percent, which is the most significant one-day loss since 2010. The currency fell below the psychologically important mark of 1,500 won per American dollar to its lowest point since the global financial crisis, and then slightly recovered.
Strategists caution that it can continue to depreciate when geopolitical tensions are still on the rise and the oil prices keep on increasing. Wee Khoon Chong, a BNY Mellon strategist, said the worst-case scenario would see the won falling to 1,570 per dollar. Brendan McKenna, a strategist at Wells Fargo in New York, said that according to the models, there are chances that the currency might drop to as low as 1,600 level in case market sentiment worsens and energy prices increase.
International Markets Prepare to Undergo Extended Uncertainty
The war between Iran, Israel and the United States has brought in another uncertainty into the financial markets. Analysts fear that long-term energy supply route interruptions, or further military escalation, will result in more economic headwinds. According to Jennifer McKeown of Capital Economics, the world economy would find it very difficult to withstand oil prices that are maintained at the level of between $90 to 100.She observed that even though the central banks might attempt to mitigate the shock by not increasing interest rates further, the anticipation of the policy easing might be deferred in case inflation picks up once more.
Other analysts continue to state that geopolitical crisis do not always terminate with the equity bull markets unless they cause prolonged disruptions in oil supply. According to Ed Clissold and Thanh Nguyen of Ned Davis Research, who have traced the market response to crises in geopolitics over decades, the conflict will not be sufficient by itself to crash the current global equity cycle. Nevertheless, the volatility is still likely to be high in the near term as the markets are responding to the changes in the Middle East that are changing very fast. Investor sentiment is now largely a geopolitical headline, according to Fawad Razaqzada of Forex.com.
The markets are currently trading on news flow to the point of almost complete reliance. A lot will be determined by whether these tensions will calm down or this will become a long-lasting supply chain disruption across the globe, he said. Those fears were shared by Kyle Rodda, the senior market analyst at Capital.com who cautioned that the magnitude of the possible supply shocks is not yet clear.
The danger in this case is the magnitude of the supply shock that the war will bring. This uncertainty can be long lasting considering the magnitude of chaos in events and the desires of all the parties involved to intensify them, he wrote. In the case of South Korea, it poses a direct threat to the economy of this country. It is the eighth-largest consumer of oil in the world, and very dependent on imported energy sources, and is therefore particularly vulnerable to long-term rises in the price of crude oil.
Jung In Yun, chief executive of Fibonacci Asset Management Global, opined that a sustained war with Iran might have a more macroeconomic effect. The presence of a prolonged conflict with Iran may result in continuously increasing prices of crude oil, which will increase the risks of upside inflation, and make the way to policy easing by the Federal Reserve difficult, said he.He said that this macro context may place a heavy burden on the high-growth areas of artificial intelligence-related equities whose valuations are particularly vulnerable to changes in interest rate expectations, and liquidity situations around the world.
The investor will not come out of caution as markets absorb the unfolding geopolitical situation and volatility in equities, currencies and commodities can be expected until there is more clarity over the duration and magnitude of the conflict.
