Asian markets were on edge on Thursday as renewed friction over the Strait of Hormuz unsettled investors, pushing oil prices higher again and reviving concerns about inflation, energy supplies and the interest-rate outlook.
The more cautious tone followed a sharp relief rally a day earlier, when markets had taken comfort from hopes that tensions in the Gulf might ease.
That optimism faded after Iran said it was in control of the Strait of Hormuz and would seek a toll from vessels using the route, a move that raised fears of fresh disruption to one of the world’s most important energy corridors.
The Strait of Hormuz carries about a fifth of global oil and liquefied natural gas flows, making any threat to traffic there especially significant for global markets.
Hormuz tensions return to the fore
Oil prices climbed as traders reassessed the risk of tighter supplies.
US crude rose 2.82% to $96.99 a barrel, while Brent crude added 2.14% to $96.74, reversing part of the previous session’s decline as the market priced back in a geopolitical risk premium.
That rebound in crude set the tone for broader trading across the region.
Investors who had spent the previous session buying into a ceasefire-driven relief trade were forced to reconsider whether the truce would be enough to stabilise shipping and contain the economic fallout from the conflict.
The result was a more defensive mood across equities, currencies and rates.
Equities lose momentum
Japan’s Nikkei 225 was little changed after surging 5.4% on Wednesday, suggesting the earlier burst of optimism had already started to fade.
South Korea’s KOSPI slipped 0.4%, giving back some of the previous session’s outsized gains as traders grew more selective in their appetite for risk.
US futures also pointed to a softer start.
S&P 500 futures were down 0.2%, while Nasdaq 100 futures slipped by the same margin, indicating that Wall Street was also taking a more cautious view of the latest developments.
In Europe, the picture was mixed, with Euro STOXX 50 futures edging higher, German DAX futures falling and FTSE 100 futures modestly firmer.
Inflation fears resurface
The renewed rise in oil has put inflation back at the centre of the market narrative.
Higher energy prices feed quickly into transport, manufacturing and household costs, and investors are increasingly worried that another sustained move up in crude could complicate the disinflation story.
That concern was reinforced by the latest Fed minutes, which struck a largely neutral tone on growth but showed that a growing number of policymakers saw a possible case for higher rates if inflation remained elevated.
Markets have steadily pared back expectations for easing, with fed funds futures now implying only minimal cuts for the rest of the year.
That marks a clear shift from the more dovish assumptions seen only weeks ago.
Bonds and currencies reflect caution
Treasury yields remained elevated as investors weighed the prospect that persistent energy inflation could keep policy tighter for longer.
The 10-year Treasury yield stood at 4.29%, well above levels seen earlier in the latest bout of geopolitical stress, suggesting bond investors are no longer convinced that weaker risk sentiment alone will be enough to bring yields down.
Currency markets also reflected the uneasy tone.
The dollar was little changed overall, while the euro held close to a recent low and the yen remained in focus as a traditional haven currency.
Gold and oil both edged higher, another sign that investors were rebuilding some protection against the risk of further turbulence.
What markets are watching
For now, the next move will depend on whether tensions around Hormuz escalate further or whether the latest rhetoric proves to be more posturing than policy.
Any concrete disruption to shipping would quickly intensify worries about supply, inflation and central-bank restraint.
That leaves markets in a fragile position.
Wednesday’s relief rally showed how quickly sentiment can improve when the threat of escalation recedes, but Thursday’s trading underlined the opposite point just as clearly.
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