How Will Iran Respond to US Military Action? Global Markets Brace for Impact

Market Reactions to US Strikes on Iran

Bangkok: Global financial markets seemed to absorb the recent US military strike on Iranian nuclear sites, with investors keenly observing Iran's forthcoming actions.

Initially, oil prices surged by over 2% but later experienced a slight decline on Monday. Meanwhile, US stock futures and a majority of Asian markets saw a downturn.

Analysts are particularly focused on Iran's potential response, as the US military's actions have raised critical questions regarding the status of Tehran's nuclear ambitions.

"The prevailing sentiment is that this conflict may be brief. The US's decisive strike could lead to a return to normalcy, minimizing the need for an immediate, alarmist reaction," stated Neil Newman, managing director at Atris Advisory Japan.

Brent crude oil, the global benchmark, saw a 1.2% increase, reaching $77.94 per barrel, while US crude rose by 1.3% to $74.82 per barrel.

The recent attacks have escalated tensions in the ongoing conflict between Israel and Iran, resulting in a 0.3% drop in futures for the S&P 500 and Dow Jones Industrial Average, with the Nasdaq futures declining by 0.5%. Treasury yields remained relatively stable.

This conflict traces back to an Israeli strike on Iran on June 13, which caused significant fluctuations in oil prices and unsettled various markets.

Iran, a key oil producer, controls the vital Strait of Hormuz, a crucial passage for global oil shipments. While closing this waterway would be challenging, it could severely disrupt oil transport, leading to soaring insurance costs and heightened risks for shippers without US Navy protection.

"The situation is highly dynamic, and much depends on whether Tehran chooses a restrained or aggressive response," commented Kristian Kerr, head of macro strategy at LPL Financial in Charlotte, North Carolina.

Iran may hesitate to block the strait, as it relies on this route for exporting its oil, primarily to China, making oil revenue vital for the regime.

In an interview with Fox News, US Secretary of State Marco Rubio warned that obstructing traffic through the strait would be "economic suicide" and would provoke a US reaction.

"I urge the Chinese government to communicate with them about this, as they heavily rely on the Strait of Hormuz for their oil supply," Rubio added.

Tom Kloza, chief market analyst at Turner Mason & Co, anticipates that Iranian leaders will likely avoid extreme measures, allowing oil futures to stabilize after initial panic subsides.

Disrupting shipping would be a "scorched earth possibility, akin to a Sherman-burning-Atlanta strategy," Kloza remarked.

In a report, Ed Yardeni, a seasoned analyst, concurred that Tehran's leaders would probably exercise restraint.

"They aren't irrational," he noted in a message to investors on Sunday. "Oil prices should decrease, and global stock markets should rise."

However, some experts express skepticism.

Andy Lipow, a Houston-based oil market analyst with 45 years of experience, cautioned that countries often act unpredictably, and he wouldn't be surprised if Tehran reacted emotionally or politically.

"If the Strait of Hormuz were entirely closed, oil prices could soar to $120 to $130 per barrel," Lipow predicted, which would translate to approximately $4.50 per gallon at the pump, adversely affecting consumers.

"This would lead to increased costs for all goods transported by truck, complicating the Federal Reserve's efforts to lower interest rates."

In early Asian trading on Monday, Taiwan's Taiex dropped by 1.4%, while South Korea's Kospi initially fell by 1% but later recovered slightly, settling at a 0.2% decrease to 3,016.71. A significant portion of East Asia relies on oil imported through the Strait of Hormuz.

In Tokyo, the Nikkei 225 dipped 0.2% to 38,344.15, with losses in most sectors offset by gains in defense-related stocks. Mitsubishi Heavy Industries rose by 0.8%, and ShinMaywa Industries, another major defense manufacturer, surged by 1.5%.

"The US strike on Iran is certainly beneficial for defense equipment," Newman from Atris Advisory noted, highlighting Japan and South Korea's substantial military manufacturing sectors.

Australia's S&P/ASX index fell by 0.4% to 8,475.70.

Hong Kong's Hang Seng index rebounded, climbing 0.4% to 23,622.71, while mainland China's markets advanced, with the Shanghai Composite index gaining 0.5% to 3,376.65.

In currency markets, the US dollar strengthened against the Japanese yen, rising to 147.16 from 146.