Indian markets were down in the dumps hearing the roar of the cannons coursing through war-torn Iran.
On Monday, the benchmark Sensex fell by over 500 points, while the Nifty lost 140 points. In fact, most Asian markets including Japan, Hong Kong, and Seoul remained largely in the red.
The US futures were down about 0.5%. However, analysts don't really see Monday's crash as a bloodbath and instead warn that markets may soak in sorrow in the coming days if events go beyond absolute mortal control.
Traders had ample time to salivate the fallouts of Friday's 'Operation Midnight Hammer,' where the US joined forces with Israel to drop powerful bombs on Iran's three nuclear facilities at Fordow and elsewhere. And as America and the rest of the world wait for Iran, which is expected to retaliate, a global market meltdown isn't entirely being ruled out.
As concerns rise over an escalating Middle East conflict, which could disrupt the energy market, and spur inflation, it's as if the world is about to encounter a fickle finger of fate. Even the faintest impulse caused by a flap of a butterfly wing could trigger a global economic mayhem. If this happens, financial markets will likely crash faster than a speeding missile and the chaos unleashed by the fiercely random interconnected impulses will be beyond what flesh and blood can take.
Though Asian stocks traded lower, the declines were moderate as investors anxiously wait for Tehran to respond. While Tokyo's key Nikkei index was down 0.6% in opening trade, Hong Kong was down 0.4%, while Seoul fell 0.7%. In commodity markets, gold edged down 0.1% to $3,363 an ounce, while the dollar index firmed up by 0.17%.
On its part, Iran has threatened to strike US bases in the Middle East and importantly, advanced plans to close the Strait of Hormuz through which 20% of the world’s oil and a quarter of its liquefied natural gas flows. Just the mere possibility of shutting down this key sea route is expected to drive energy prices to catastrophic levels, which Goldman Sachs estimates at $150 per barrel or more.
Moreover, Iran is the world's ninth-biggest oil-producing country with an output of about 3.3 million barrels per day and escalation will deliriously drive both oil supply and prices down. Look any which way, it seems to be a crapshoot for the global economy. On Monday though, crude oil prices hit five-month highs, intensifying concerns over inflation and global growth.
While WTI crude oil hit a high of $78.4 per barrel, Brent was up a relatively restrained 2.7% at $79.12 per barrel. In all, oil prices were up over 2%, and although Brent crude oil prices shot up from a low of about $60 per barrel in early May to nearly $80 per barrel currently, it remains slightly below the highs seen in January. If you recall, global oil prices surged to an unprecedented $140 per barrel in 2022, influenced by the escalation of the Russia-Ukraine conflict.
However, as the US released strategic oil reserves followed by OPECs' multiple production cuts, it prompted a decline in oil prices in a brief period. What's unclear is if oil supply and prices can be contained like in 2022, if the ongoing Israel-Iran conflict intensifies. According to Goldman Sachs, any potential disruption in the Strait of Hormuz could lead to significant spikes in oil and natural gas prices. It estimated Brent crude to peak to $110 per barrel if oil flows through the critical waterway were halved for a month and remained down by 10% for the following 11 months. Prices would then moderate, with Brent averaging $95 per barrel in Q2 of 2025, it added. A $10-a-barrel increase would raise US' retail inflation by 0.5 percentage points, and lower real GDP by 0.1-0.2% in Q4, 2025, according to estimates by Oxford Economics. Historical data also indicates that a permanent increase of 10% in oil prices only pushes core inflation up by a few basis points in the US, which is the world's largest oil producer. But for an oil importing country like India, it will be a devastating blow.
