MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.5% to extend losses for a second ‌day

A selloff in stocks deepened on Tuesday and the dollar strengthened as investors considered the implications of U.S. and Israeli strikes ​on Iran on energy prices and the global economy.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 1.5% to extend losses for a second ‌day, led by a drop of 4.1% in Korean shares. Nikkei 225 plunged 2.3% and S&P 500 e-mini futures were down 0.6%.

Economic policy uncertainty was already elevated and now with the Iran conflict, the geopolitical risk is expected to rise too, said Rupal Agarwal, Asia quant strategist at Bernstein in Singapore. Last time both spiked was in 2022 during the Russia-Ukraine conflict, which didn’t work ​well for Asian markets.

U.S. stock market stabilised after a volatile session on Monday which saw the S&P 500 rally from an early selloff to close flat and the ​Nasdaq Composite climb 0.4% as investors bought the dip in markets.

After oil and gas prices surged on Monday, Brent crude futures tacked on another 2% to $79.22 on Tuesday. In natural gas markets, benchmark European and Asian LNG prices leapt by almost 40% on Monday.

After oil and gas prices surged on Monday, Brent crude futures rose 2% to $79.22 on Tuesday. In natural gas markets, benchmark European and Asian LNG prices jumped by nearly 40% on Monday.

The spike in energy prices could ramp up costs for Asian companies and weigh ​on their profits and their stocks, which have rallied sharply so far this year.

We estimate a 20% rise in Brent could reduce regional earnings by 2% with wide intraregional ​variation, but this depends on the duration of the conflict, analysts from Goldman Sachs wrote in a research report. Spikes in geopolitical risk tend to have a negative short-term effect but dissipate over ‌time, they ⁠said. The current rise in geopolitical risk coincides with regional vulnerability to a correction.