(Sharecast News) - Asia-Pacific markets sold off sharply on Monday as escalating tensions between the United States and Iran unsettled investors, with major benchmarks in Japan and South Korea leading declines amid fears over disruptions to energy flows through the Strait of Hormuz.
As Stephen Innes, managing partner at SPI Asset Management, put it, "This is no longer a market picking winners; it is a market searching for oxygen."
Regional sentiment deteriorated as the conflict entered its fourth week, with US president Donald Trump warning he would "obliterate" Iran's power plants if Tehran failed to fully reopen the strategic shipping route within 48 hours.
Iran responded with threats to target energy infrastructure and desalination facilities across the Gulf, while Parliament speaker Mohammad Bagher Ghalibaf said attacks on Iran would be met with retaliatory strikes on regional oil and energy assets, adding that "critical infrastructure and energy and oil infrastructure throughout the region will be considered legitimate targets and irreversibly destroyed, and oil prices will rise for a long time."
He also warned that holders of US Treasurys could be considered targets.
Innes said the escalation marked a shift in market dynamics, with "the Strait of Hormuz has moved from a geopolitical headline to a pricing mechanism."
Equities plunge across Asia
In Japan, the Nikkei 225 fell 3.48% to 51,515.49, with the broader Topix down 3.41% at 3,486.44.
Losses were broad-based, led by Mitsubishi Materials, which dropped 9.35%, Renesas Electronics, down 9.16%, and Ibiden, which declined 8.81%.
Reflecting the intensity of the sell-off, Innes noted: "What we are seeing is not rotation, it is evacuation."
Chinese equities also came under heavy pressure, with the Shanghai Composite falling 3.63% to 3,813.28 and the Shenzhen Component losing 3.76% to 13,345.51.
Jiangsu Sanfangxiang Industry slumped 10.14%, Henan Taloph Pharmaceutical Stock fell 10.06%, and Northern United Publishing & Media Group dropped 10.04%.
In Hong Kong, the Hang Seng Index declined 3.54% to 24,382.47, as Laopu Gold fell 8.59%, China Hongqiao Group lost 8.12% and AIA Group dropped 7.79%.
South Korea's Kospi 100 recorded the steepest losses in the region, plunging 6.7% to 6,183.72.
Hybe tumbled 15.55%, while Hanmi Pharm and Hyundai Heavy Industries fell 10.54% and 10.2%, respectively.
The breadth of declines across asset classes reinforced Innes' view that "the usual diversification playbook is being quietly set on fire."
Markets more resilient down under
Australian and New Zealand markets were more resilient but still ended lower.
The S&P/ASX 200 in Sydney slipped 0.74% to 8,365.90, dragged down by Greatland Resources, IperionX and Capricorn Metals, which fell 9.79%, 8.81% and 8.37%, respectively.
Across the Tasman Sea, New Zealand's S&P/NZX 50 edged down 0.69% to 12,899.72, with Serko declining 8.65%, Tourism Holdings falling 7.79% and ANZ Group Holdings losing 5.33%.
Yen strengthens modestly as oil prices fall back
In currency markets, the yen strengthened modestly, with the dollar last down 0.38% to trade at JPY 158.63.
The greenback was little changed against the Aussie at AUD 1.4232, while it rose 0.44% on the Kiwi to change hands at NZD 1.7222.
Innes said the moves reflected a scramble for liquidity, with "the dollar becomes less a currency and more a clearing tool" and warning that "high beta FX does not stand a chance in that environment."
Oil prices, which had surged in recent weeks on supply concerns, fell sharply after signs of potential de-escalation.
Brent crude futures were last down 7.67% on ICE at $103.58 per barrel, and the NYMEX quote for West Texas Intermediate fell 8.23% to $90.15, after Trump said Washington and Tehran had held "very good and productive conversations" and announced a five-day pause on planned US strikes against Iranian energy infrastructure.
"I HAVE INSTRUCTED THE DEPARTMENT OF WAR TO POSTPONE ANY AND ALL MILITARY STRIKES AGAINST IRANIAN POWER PLANTS AND ENERGY INFRASTRUCTURE FOR A FIVE DAY PERIOD," he said on social media.
Despite the pullback, uncertainty over the reopening of the Strait of Hormuz continued to cloud the outlook.
Goldman Sachs said it expected Brent crude to average $110 in March and April, up from a previous $98 forecast, while WTI was seen averaging $98 in March and $105 in April.
The bank added that it assumed Hormuz flows would remain at just 5% of normal levels for six weeks before gradually recovering, with prices likely to remain elevated until markets gained confidence that prolonged disruption could be avoided.
Innes added that "the trigger for a reversal is not technical; it is geopolitical," noting that without a credible de-escalation, "dips in the dollar are likely to be treated as opportunities rather than turning points."
Reporting by Josh White for Sharecast.com.
24.18 (0.24%)
631.00
0.00