Global oil prices experienced a sharp increase Monday, and Asian stock markets largely fell, following airstrikes carried out by the U.S. and subsequent retaliation from Iran. The price of Brent crude, the international benchmark, rose 4.7% to $79.59 per barrel, while U.S. benchmark crude oil increased by 4.8% to $74.85 per barrel.
These price hikes occurred after a period of decline, when both oil types had reverted to pre-conflict levels. This recent stability was attributed to an interim agreement between the U.S. and Iran aimed at de-escalating tensions and the resumption of oil transport through the Strait of Hormuz. However, the U.S. initiated multiple strikes against Iran early Monday morning in response to an Iranian attack on a container ship in the strait, which resulted in the vessel being set ablaze and the disappearance of a crew member over the weekend. Iran reportedly retaliated by targeting countries across the Middle East.
The geopolitical developments led to a downturn in U.S. stock futures, with the S&P 500 contract down 0.6% and the Dow Jones Industrial Average contract down 0.4%. The Nasdaq composite future saw a more significant drop of 1.3%.
In Asian trading, Tokyo's Nikkei 225 index lost 2.2%, closing at 67,055.67, while Seoul's Kospi declined 8.2% to 6,864.84. Shares of South Korean memory chipmaker SK Hynix, which had seen a substantial jump on Wall Street the previous Friday, slumped 13.3% in Seoul. Its competitor, Samsung Electronics, fell 10.5%.
Other Asian markets showed mixed performance. Hong Kong's Hang Seng index edged up 0.1% to 24,200.67, while the Shanghai Composite index in China shed 1.9% to 3,920.50. In Australia, the S&P/ASX 200 declined 0.1% to 8,792.30.
Previously, U.S. stocks had shown a slight upward trend on Friday, driven by investor interest in artificial intelligence (AI) related companies. The S&P 500 rose 0.4%, the Dow Jones Industrial Average added 0.3%, and the Nasdaq composite climbed 0.3%. The strong performance of AI stocks, including Nvidia, which rose 4%, played a significant role in lifting the S&P 500.
Concerns are also surfacing regarding the sustainability of AI stock valuations. SK Hynix's recent surge in Seoul, which followed its U.S. stock debut where it raised approximately $26.5 billion by selling American depositary shares, highlights the market's enthusiasm for AI. The company's stock in Seoul had already increased over 600% in the past year, fueled by demand for computer memory essential for AI technologies. Analysts note that while AI demand has created perception of sustained growth for memory chipmakers, this sector has historically been subject to boom-and-bust cycles. There are underlying worries that current AI stock prices may be too high, and that global investment in chips and data centers might not yield sufficient productivity and profit growth to justify these valuations.
SK Hynix has announced plans to potentially double its production capacity to meet demand. However, "Technological breakthroughs, more efficient AI models or simply a slowdown in AI infrastructure investment could quickly turn the market into one of oversupply," according to Ipek Ozkardeskaya of Swissquote. Similar concerns are being applied to many AI stocks that have become influential on Wall Street due to their substantial market capitalizations.
Beyond AI market dynamics, attention is turning to the upcoming corporate earnings reporting season for the spring. Companies will face pressure to demonstrate significant profit growth to validate their current stock price levels, many of which are near record highs. The upcoming week is set to feature earnings reports from major U.S. banks, including Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo, all scheduled for Tuesday.
The ongoing conflict with Iran is casting a shadow over the economic outlook, particularly concerning the global flow of crude oil and its potential impact on energy costs and overall inflation. High bond yields have been a persistent factor weighing on financial markets globally, as elevated oil prices and inflation could prompt central banks, including the Federal Reserve, to consider raising interest rates. While higher rates can help control inflation, they also tend to slow economic activity and negatively affect investment prices.
In currency markets early Monday, the U.S. dollar strengthened against the Japanese yen, moving to 162.10 from 161.72. The euro saw a slight decrease, trading at $1.1405 compared to $1.1408 previously.