Asian stock markets took a hard hit Wednesday after the US and Iran traded blows in their most significant military exchange since a ceasefire took effect in April. The escalation sent investors scrambling, though the reaction in energy markets proved more muted than might have been expected.
The confrontation began when the US launched strikes on Iran following Donald Trump's claim that Tehran downed a US military helicopter near the Strait of Hormuz. Iran responded with retaliatory fire early Wednesday, directing strikes at targets in Kuwait, Bahrain, and Jordan.
Japan's Nikkei 225 fell 2%, while South Korea's tech-focused Kospi index plummeted roughly 6%. Despite the sharp intraday losses, the Kospi has still gained more than 70% since the start of the year. Europe looked poised for restraint at the open, with FTSE 100 futures signaling just a 0.1% drop and EuroStoxx 50 futures also down 0.1%.
Oil prices, surprisingly, dipped slightly on the morning's trading. Brent crude, the international benchmark, fell 0.2% to $91.28 per barrel. The modest decline masks the volatility underneath. Brent briefly broke below $90 for the first time since mid-April before rebounding after Trump signaled he would retaliate for the helicopter downing.
Analysts noted the market's divided focus. Deutsche Bank strategist Jim Reid pointed out that investors face competing pressures: Middle East tensions on one hand, and on the other, the familiar psychological battle between artificial intelligence euphoria and fears of a tech-sector crash. The Philly Semiconductor Index fell as much as 8.62% during intraday trading before recovering to finish down just 1.93%.
China released fresh economic data showing its factory gate prices rising at the quickest pace in four years. The producer price index climbed 3.9% in May compared to a year earlier, surpassing the 3.8% estimate and April's 2.8% increase. This marks the third straight monthly advance and the fastest growth since July 2022.
Pantheon Macroeconomics economists characterized the jump as "largely a cost push story, not stronger demand." Kelvin Lam, the firm's senior China economist, attributed the gains to lingering effects from elevated energy costs tied to the Middle East conflict, alongside the fading impact of unfavorable comparisons from the previous year.
Monthly momentum told a different story. Factory gate prices rose just 0.5% in May from April, down sharply from April's 1.7% jump. Oil futures traders have stepped back from pricing in further regional escalation, with the once-feared $150-per-barrel scenario now seeming remote. China's subdued domestic demand also limited producers' ability to push through price increases despite higher input costs.
Today's agenda includes a British regulatory deadline on the Telegraph and Mail newspaper deal, but the afternoon's main event will be US inflation data for May. Economists expect the headline consumer price index to rise to 4.2% year-on-year, with a 0.5% monthly jump. Concern centers on whether elevated wholesale energy costs are bleeding into the broader economy, especially given that Middle East tensions appear entrenched and resolution uncertain.
Author James Rodriguez: "Oil markets aren't panicking yet, but China's inflation surge and today's US CPI print will tell us whether energy shocks are genuinely translating into sustained cost pressures."
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