Asian Markets Slide as Gulf Conflict and Oil Spike Shake Global Investors

BY COMFORT OGBONNA

Asian share markets fell sharply on Monday as renewed drone attacks in the Gulf pushed oil prices and bond yields higher, deepening concerns over inflation, global growth, and financial stability. The decline came as investors also braced for major earnings reports from leading technology firms, including Nvidia, which could determine whether the recent artificial intelligence-driven rally continues.

Tensions in the Middle East escalated after a drone strike caused a fire at a nuclear power facility in the United Arab Emirates, while Saudi Arabia reported intercepting three drones entering its airspace. The latest incidents added to fears that the ongoing Iran-related conflict could spill further into key energy-producing regions.

U.S. President Donald Trump warned that Iran needed to act quickly to reach a deal, as diplomatic efforts to de-escalate the situation appeared to stall. At the same time, reports suggested that shipping activity in the Strait of Hormuz—a critical global oil transit route—had been severely disrupted, with only limited traffic passing through the waterway under tense conditions.

The Strait typically handles around 20% of global oil trade, making it one of the most strategically important chokepoints in global energy markets. Analysts warned that any prolonged disruption could rapidly drain global oil inventories and push energy prices significantly higher.

Some market strategists have raised extreme scenarios for oil prices if the situation worsens further. Capital Economics analysts warned that continued disruption could force Brent crude toward $130–$140 per barrel if inventories fall to critical levels by late June. In a more severe scenario where the Strait remains constrained for an extended period and oil prices remain elevated into 2027, inflation could surge sharply across major economies, potentially triggering recession conditions.

Oil markets reacted strongly to the heightened risk. Brent crude rose 1.9% to $111.34 a barrel, while U.S. West Texas Intermediate gained 2.2% to $107.72. Futures for later delivery months also climbed above key psychological levels, with September contracts moving above $100 and December reaching record highs, reflecting expectations of prolonged supply shortages.

The spike in energy prices quickly fed into global bond markets, where yields surged as investors priced in the risk of sustained inflation. U.S. 10-year Treasury yields hit a 15-month high of 4.631%, while 30-year yields climbed to 5.159%. Japanese bond yields also rose to levels not seen since 1996, driven by concerns over increased government borrowing to support economic stability during the crisis.

Rising yields have heightened expectations that central banks may be forced to maintain or even tighten monetary policy to control inflation. Market pricing now suggests roughly even odds that the U.S. Federal Reserve could raise interest rates later this year, reversing earlier expectations of policy easing.

Investors are also closely watching upcoming Federal Reserve communications, including minutes from its latest policy meeting due this week. Attention will focus on whether policymakers are shifting toward a more neutral stance in response to persistent inflation pressures.

Meanwhile, political attention is turning to international coordination, with G7 finance ministers set to meet in Paris to discuss the Strait of Hormuz crisis and global supply risks. However, analysts warn that geopolitical divisions among member countries could limit the group’s ability to respond effectively.

Equity markets reflected the growing uncertainty. Japan’s Nikkei index slipped 0.9% after recent losses from record highs, while South Korea’s benchmark index declined modestly. Broader Asia-Pacific shares excluding Japan dropped 0.8%, and Chinese blue-chip stocks fell 0.6% following weaker-than-expected economic data, including sluggish retail sales and industrial output growth.

In the United States, futures for the S&P 500 and Nasdaq fell as investors reduced exposure to risk assets. European futures also pointed lower, with both the Euro STOXX 50 and Germany’s DAX expected to open down around 1%.

Despite recent strength in U.S. equities driven by strong corporate earnings, analysts at Citi warned that gains have been narrowly concentrated in a small group of large companies. They noted that much of the earnings growth has been supported by one-off factors rather than broad-based improvement, raising concerns about the sustainability of the rally.

Attention is now turning to Nvidia, whose earnings report this week is expected to be a major test for the artificial intelligence trade that has powered global markets higher. The company’s shares have surged sharply since March, while the broader semiconductor sector has seen strong gains on expectations of continued demand for AI infrastructure.

Retail earnings, including results from Walmart, are also due and will provide insight into consumer resilience in the face of rising energy prices and economic uncertainty.

In currency markets, the U.S. dollar strengthened as investors sought safety amid global instability. The euro and British pound both fell sharply against the dollar last week, while the Japanese yen remained under pressure near key intervention levels.

Gold prices remained relatively steady, suggesting that despite heightened geopolitical risk, investor demand for traditional safe-haven assets has not yet surged significantly.

Overall, markets remain highly sensitive to developments in the Gulf, with energy security, inflation expectations, and central bank policy outlooks now tightly linked to the trajectory of the conflict.