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At noon, the ASX 200 has decreased by 4.4%, indicating a significant sell-off across nearly all sectors, with the notable exception of a few energy stocks. Should this trend continue, it would represent the most substantial single-day drop since the onset of the pandemic.
Global equity markets are facing turmoil due to the ongoing conflict in Iran, which has driven WTI crude oil prices up approximately 25% to reach US$114 per barrel. This increase follows a staggering 35% surge the previous week, marking the largest weekly gain for oil prices since the pandemic. Correspondingly, Wall Street futures are sharply down, with S&P 500 and Nasdaq futures dropping 2.3% and 2.6%, respectively.
Summary of the Iran Conflict
- Start of Hostilities: The US and Israel launched a significant military operation against Iran on 28 February, escalating long-standing tensions rooted in Iran’s nuclear ambitions and its support for various regional proxies.
- Key Developments: The assassination of Supreme Leader Ali Khamenei, who had been in power since 1989, marked a pivotal moment in the conflict.
- Military Action: US and Israeli forces have struck over 3,000 targets, crippling 80% of Iran’s air defences and capturing 43 naval vessels, thereby severely diminishing Iran’s defensive capabilities.
- Iran’s Response: Iran retaliated by launching attacks on over 27 US military bases and making more than 90 strike attempts against Israel.
- Change in Leadership: Mojtaba Khamenei, the late leader’s son, has assumed leadership, raising questions about the potential shift in Iran’s stance regarding nuclear weapons policy.
- Military Readiness: Iran claims it can maintain high-intensity conflict for at least six months, hinting at an escalation rather than a de-escalation of tensions.
The Current Market Dip
Today’s market performances are set to eclipse previous notable downturns, reminiscent of Trump’s "Liberation Day" sell-off last April. The ASX began the day down by approximately 2.7% and has since declined further. With nearly all ASX 200 constituents (97%) experiencing losses, only a handful of energy stocks have maintained their upward trajectory, including firms like Yancoal, Santos, and Woodside.
Large-cap stocks are also suffering substantial losses, with many down between 4% and 6%. Notably:
- Commonwealth Bank (CBA): -4.04% ($165.50)
- BHP Group: -6.48% ($49.39)
- Rio Tinto: -4.82% ($151.03)
The market has also experienced a significant dip from several resource-related, travel, and tech sectors.
Bond Yield Climbs
Rising oil prices are fuelling inflation worries, causing the Australian 10-year bond yield to climb 340 basis points over the past six sessions, hitting levels not seen since July 2011. Analysts are currently pricing in a 30% chance of an interest rate hike by the Reserve Bank of Australia in their upcoming meeting, with a more significant increase expected by May.
Future Outlook
The trajectory of the market hinges greatly on the resolution of the Iran conflict. Recent strikes by Israel and the US on Iranian oil infrastructure have exacerbated tensions, leading to a rapid increase in oil prices. Should this situation persist without any avenues for negotiation, the added inflationary pressure could complicate the economic landscape for Australia.
With the ASX 200 operating at a forward price-to-earnings ratio of 18.7, current valuations appear inflated amidst this tumultuous earnings and inflation backdrop, raising further concerns about sustainability. A diplomatic breakthrough, however, remains the most crucial factor in restoring market stability and curbing soaring oil prices and yields.
