Asian stocks fall as US and Iran exchange fire

Asian stock markets experienced a significant downturn, with Japan's Nikkei index dropping 2% and the tech-heavy South Korean Kospi slumping by approximately 6%. This decline follows a major exchange of fire between Iran and the United States, the most substantial since a ceasefire was established in April.

The US initiated strikes against Iran after President Donald Trump accused Tehran of downing a US army helicopter near the Strait of Hormuz. In response, Iran launched retaliatory strikes on Wednesday morning, claiming to have targeted Kuwait, Bahrain, and Jordan. Despite the escalating geopolitical tensions, oil prices saw a minor decrease, with Brent crude trading down 0.2% at $91.28 a barrel.

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markets are also swinging between 1999-style AI exuberance and 2000-type tech crash fears.

Analysts suggest that while the Middle East conflict occupies investors' attention, broader market sentiment is also influenced by a dichotomy of "1999-style AI exuberance and 2000-type tech crash fears." This is reflected in market movements, such as the Philly Semiconductor Index's intra-day volatility.

Meanwhile, China reported that its factory gate prices increased by 3.9% in May compared to the previous year, marking the fastest rise in four years. This surge is attributed to elevated energy prices, a consequence of the conflict in Iran. Economists view this as a "cost push story" rather than a sign of stronger demand, with expectations that imported energy costs will continue to drive inflation in the near term.

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Reflation is expected to continue in the near term due to the lasting impact of the war in Iran on imported energy costs, and of course the fading drag from from negative carry-over effect from last year, which most people forget.