Stocks were sold off in Asia for a third straight day as investors grappled with mounting uncertainty over the duration of the Middle East conflict and inflationary pressures, damping appetite for risk.
The MSCI Asia Pacific Index slumped as much as 3.4 per cent, with South Korean stocks posting their biggest two-day drop since 2008 amid mounting panic across trading desks.
The Asian moves snapped a late rebound in the US markets after US President Donald Trump’s assurances on protecting shipping through the Strait of Hormuz helped calm nerves. Brent crude traded close to $82 a barrel.
“Asian markets are choking on a toxic cocktail – surging energy prices, a resurgent dollar and geopolitical tensions that nobody is sleeping through any more,” said Hebe Chen, a senior market analyst at Vantage Global Prime. “This isn’t just a technical pullback but more of psychological capitulation.”
The US-Israeli attack on Iran has destabilised the Middle East and threatens to deliver a new inflationary shock to the global economy by pushing up oil prices.
There’s also no clear sense of when or how the war will end, raising the prospect of a prolonged conflict and unforeseen consequences beyond the White House’s control.
“The risk here is the scale of the supply shock the war will create,” wrote Kyle Rodda at Capital.com. “Given the very chaotic nature of the events and the strong incentive for all combatants to escalate right now, this uncertainty could drag on for a while.”
South Korea slump
Panic and angst swept across trading desks in South Korea as local stocks, by far the hottest in the world over the past year, extended their fall into Wednesday.
Down another 11 per cent following a 7.2 per cent drop in the previous session, the high-flying Kospi Index is headed for its biggest two-day drop since 2008. The losses were driven by the heavyweights that had supercharged the market higher until last month – Samsung, SK Hynix and Hyundai.
The sharp losses, as foreigners bailed out, marked an abrupt turn for a market that had soared on a world-beating, artificial intelligence-driven rally.
Trading in both Kospi and Kosdaq shares was suspended for 20 minutes after the gauges fell by the 8 per cent threshold.
Some investors pointed to forced selling of leveraged bets as a driver behind the steep loss.
“Moves are too extreme so forecasting feels almost impossible – analysis doesn’t really help,” said An Hyungjin, chief executive at Seoul-based Billionfold Asset Management.
“Retail investors seem to hesitate as well, bids are fading since yesterday. While we’re picking quality names and hedging, this isn’t a clear opportunity.”
Meanwhile, the South Korean won also weakened past a key psychological barrier for the first time in 17 years, as the widening Middle East war raised worries for the world's fourth-largest oil importer.
The won briefly breached the 1,500 mark overnight to hit its weakest level since March 2009 at 1,505.8, before closing the session down 3.1 per cent at 1,485.7. It was up 0.3 per cent at 1,481.5 on Wednesday morning.
“The focus overnight was on South Korea and the Kospi weakness linked to the country's energy dependence on Gulf supply,” BNY Mellon economists said in a note.
The growing risks of a drawn-out war in the Middle East have particular significance for net oil importing countries such as South Korea, which relies almost totally on imports for its energy.
“We will closely watch if won exchange rates and bond yields deviate excessively from domestic fundamentals even with external factors in consideration,” the Bank of Korea said in a statement soon after the market opened on Wednesday, as the central bank vowed to respond to herd-like behaviour.
The latest Middle East conflict is different from Mr Trump’s trade war, his talk of invading Greenland or his assault on the Fed’s independence, all of which unnerved investors globally.
In each case, traders came to expect that Trump would backtrack if markets fell too far, a strategy that came to be known as the Taco trade, which stands for Trump Always Chickens Out – and created a buy-the-dip mentality that allowed stocks to rally back.
“For now, markets are trading headline to headline,” said Fawad Razaqzada at Forex.com. “Much will depend on whether tensions stabilise – or whether this proves to be the start of a more prolonged disruption to global supply.”
With inputs from Bloomberg and Reuters
