Asian stock markets opened the week under pressure as concerns about an escalation in the U.S.-Israel conflict with Iran prompted a widespread retreat from riskier assets.
Japan and South Korea were hit the hardest. Tokyo's benchmark indexes declined sharply, while Seoul's main market dropped the most in the region. Both markets - along with India - are seen in this episode as relatively exposed to potential interruptions to global energy flows, heightening investor sensitivity to developments in the Middle East.
Underlying the market reaction was a renewed focus on energy prices and the potential for higher inflation. The prospect that rising crude could sustain or increase inflationary pressures - and thereby encourage central banks to retain or tighten policy settings - contributed to selling. Oil prices remained firm during Asian trading hours, reinforcing those concerns.
Regional markets also followed a downbeat lead from Wall Street, which recorded a fourth consecutive week of losses amid limited signs that the Middle Eastern conflict is easing. S&P 500 futures were lower in late New York trading.
Japan and South Korea: the weakest links
Japan's Nikkei 225 and TOPIX fell in the range of 2.8% to 3.5%. South Korea's KOSPI plunged by almost 5%, making it the weakest major market in Asia on Monday.
Seoul's decline reflected not only geopolitical risk but also local monetary policy concerns. The government nominated economist Shin Hyun-song as the next governor of the Bank of Korea. Shin's past comments have been interpreted as hawkish - notably his warnings about excessive lending and inflation. ING analysts characterized the nomination as signaling a more hawkish stance at the central bank, raising the probability of further rate increases later in the year.
Broader Asian performance
Markets across the rest of Asia dropped as investors pared back exposure to equities amid the worsening Middle East situation. Hong Kong's Hang Seng fell 3.1%. Mainland China indexes - the Shanghai Shenzhen CSI 300 and the Shanghai Composite - each lost about 2%.
Elsewhere, Australia's ASX 200 was down 0.7% and Singapore's Straits Times slid 1.8%. Futures for India's Nifty 50 were lower by 0.3%.
The geopolitical backdrop intensified after a weekend exchange of stark warnings. On Saturday evening, President Donald Trump issued a 48-hour ultimatum to Iran to reopen the Strait of Hormuz or face the United States 'obliterating' critical energy infrastructure in the country. Iran countered by threatening to strike energy and water infrastructure across the Middle East and said it would entirely close the Strait of Hormuz if the U.S. followed through.
The conflict entered its fourth straight week with reports of continued strikes in Iran and Israel as of early Monday, and little sign of de-escalation.
Against this backdrop, investor risk appetite weakened and selling pressure spread across sectors that are sensitive to growth and energy pricing.
Market metrics referenced in this article include movements in major regional indexes and late New York S&P 500 futures.