Asia report: Most markets lower on heightened Middle East tension

Japan led most Asian markets lower on Monday, as investors reacted to increased geopolitical tension in the Middle East after last week’s killing of a top Iran military commander in Iraq by the United States.

In Japan, the Nikkei 225 returned from its extended New Year holiday by falling 1.91% to 23,204.86, as the yen strengthened 0.05% to JPY 108.04.

Weakness was a theme across the benchmark’s major components, with automation specialist Fanuc down 1.62%, Uniqlo owner Fast Retailing 3% lower, and technology conglomerate SoftBank Group falling 3.93%.

The broader Topix index was 1.39% weaker in Tokyo, closing its trading day at 1,697.49.

On the mainland, the Shanghai Composite slipped 0.01% to close at 3,083.41, and the smaller, technology-heavy Shenzhen Composite rose 0.44% to 1,768.68.

South Korea’s Kospi was 0.98% weaker at 2,155.07, while the Hang Seng Index in Hong Kong lost 0.79% to 28,226.19.

The blue-chip technology stocks were mixed in Seoul, with Samsung Electronics flat, and chipmaker SK Hynix down 0.21%.

Geopolitical tensions remained high on Monday, after US president Donald Trump last week approved an airstrike near Baghdad Airport in Iraq, killing Iran’s top military commander Qasem Soleimani.

In retaliation, Iran vowed on Sunday that it would no longer voluntarily abide by the uranium enrichment limits established in its 2015 deal with the United States - an agreement Trump pulled out of in 2018.

At the same time, the US president threatened sanctions on Iraq after that country’s parliament agreed to a resolution calling for foreign troops to be expelled from the country, given the airstrike was carried out in its territory.

“In September, a drone attack on Saudi Arabia’s Abqaiq crude-processing plant sent Brent prices 20% higher, but those gains were rapidly reversed as production was quickly restored and markets saw it as a short-term risk event,” said Hussein Sayed, chief market strategist at FXTM.

“In the current environment, it’s hard to tell whether we’ll see a larger disruption in oil supplies that could send prices much higher.

“Interestingly, we note some investors are buying call options near $100 to insure or profit from massive price spikes.”

Sayed said they were predicting that Iran would target shipping in the Strait of Hormuz, which was responsible for a fifth of the world’s oil supply flow.

“If this strait is blocked, even for a short period, it will lead to prices skyrocketing.

“At $70-$80 a barrel, the global economy is not likely to feel much impact from this rise in prices, but as we get closer to $100 there will be severe consequences, which would trigger steep selloffs in equity markets.”

Oil prices continued to rise at the end of the Asian day amid the Middle East tension, with Brent crude last up 1.41% at $69.58 per barrel, and West Texas Intermediate adding 1.16% to $63.79.

In Australia, the S&P/ASX 200 eked out gains of 0.03% to 6,735.70, as the hefty financials subindex dragged on the benchmark by falling 0.58%.

The sunburnt country was still grappling with a wildfire crisis, with large swathes of eastern states ablaze, at least 20 people killed and entire towns believed to be destroyed.

Across the Tasman Sea, New Zealand’s S&P/NZX 50 was 0.29% firmer at 11,627.32, as infrastructure operator Infratil rose 3.5% after hitting an intraday record high during the session.

The down under dollars were mixed against the greenback, with the Aussie last 0.03% weaker at AUD 1.4394, while the Kiwi strengthened 0.18% to NZD 1.4979.