Stocks skid in Asia, bonds buckle as oil climbs

Asian markets experienced a significant downturn as escalating tensions in the Middle East sent oil prices and bond yields soaring. The region's financial hubs saw a broad sell-off, reflecting growing investor anxiety over geopolitical instability and its potential impact on global economic growth. The drone attacks in the United Arab Emirates and Saudi Arabia, alongside Iran's assertive stance in the Strait of Hormuz, have created a volatile environment, disrupting crucial oil supply routes.

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The closure is draining global oil inventories fast. Inventories could reach critical levels by end-June, setting the stage for Brent at $130-140pb, if not higher.

Analysts warn that the continued closure of the Strait of Hormuz, a vital artery for global oil trade, could rapidly deplete inventories and trigger a sharp rise in crude prices. This surge in energy costs poses a significant threat of inflation, potentially forcing central banks worldwide to tighten monetary policy more aggressively. The prospect of higher interest rates and a potential global recession looms large as markets grapple with these complex challenges.

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If the strait is closed through year-end and oil stays around $150pb into 2027, that would push inflation to near 10 per cent in the UK and euro zone, send rates back to their recent peaks and lead to global recession.

Adding to the market's unease, key economic data from China disappointed, with retail sales and industrial output figures falling short of expectations. This slowdown in the world's second-largest economy further dampens investor sentiment. Meanwhile, the upcoming earnings report from AI giant Nvidia is poised to be a critical test for the technology sector, which has been a strong performer. The confluence of geopolitical risks, inflationary pressures, and economic uncertainties has created a challenging backdrop for investors across Asia and beyond.

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The minutes of the Fed's last meeting are out on Wednesday and should show how much pressure there was on the committee for a shift to a neutral stance and away from an easing bias.