The Morning Edge: Asia Stocks Slide as Iran War Escalation Fuels Oil, Risk Fears

Global Mood: Cautiously Risk-off

Drivers: US-Iran War Reignites, Israel Raids Gaza, rise in Oil prices

Asian stock markets fell sharply on Wednesday as the escalation in the US-Iran conflict heightened concerns over energy supplies and global risk sentiment. Japan’s Nikkei 225 plunged 2.48%, South Korea’s Kospi dropped 2.6%, and Australia’s S&P/ASX 200 declined 1.35%, while Hong Kong’s Hang Seng opened 0.19% lower.

The selloff came amid heightened tensions in West Asia, with no signs of a de-escalation and uncertainty growing over the safe passage of vessels through the Strait of Hormuz. The US Embassy in Dubai warned of further “unforeseen escalation”, adding to investor caution as rising crude prices threatened to fuel inflation and weigh on global growth.

THE BIG STORY

The US-Iran conflict erupted back into full military exchange Tuesday as Washington launched a fresh barrage of strikes on IRGC targets across Iran — hitting air defences, radar systems, maritime assets, mine-laying capabilities and communications sites in Ahvaz, Jiroft airport, Chabahar, Bandar Abbas, Asaluyeh and Qeshm Island — while Iran retaliated with ballistic missiles and drones against US bases in Jordan, Bahrain and Iraq.

Five civilians, including a four-year-old child, were killed at a wedding near Sirik in the US strikes, an incident with no immediate US response. Iran claimed to have killed a large number of US forces in Jordan — the US denied any casualties — and Iran's parliament speaker warned that if the US wanted to stop Iranian oil exports, "no one will be able to export oil from the Gulf." Trump escalated rhetorically, saying any agreement with Iran "isn't worth the paper it's written on" and threatening that the biggest attack of all was "waiting in the wings."

Oil settled at a five-week high. Two tankers were also struck leaving Hormuz on Monday, underscoring that the strait remains a live conflict zone six months into a war that has achieved none of its stated objectives.

Putin struck a hawkish and confident tone Tuesday, claiming Russian forces captured 270 square km of Donetsk in August, have two large Ukrainian troop groups surrounded, and are advancing toward Sloviansk and Kramatorsk. He called Zelenskiy's government "terrorists" with whom Moscow cannot negotiate, while leaving the door open to talks through US envoys if they bring "something positive."

In Gaza, Israeli special forces captured Hamas's internal security chief in a raid on Gaza City, killing four Palestinians including two children in covering strikes, as Hamas warned mediators that Israeli operations were undermining the ceasefire framework. Over 1,300 Palestinians have been killed in Gaza since the October ceasefire took effect.

Data Spotlight

The ISM Manufacturing PMI eased to 54.6 in August from July's near four-year high of 55.6, missing expectations of 55.2, as new orders slowed sharply to 53.7 and employment growth moderated. The Prices Index remained elevated at 71.1 and the Supplier Deliveries Index rose to 59.3, reflecting continued supply chain delays tied to tariffs and the West Asia conflict.

US job openings rose to 7.271 million in July, below expectations of 7.30 million, with gains in manufacturing, healthcare and wholesale trade offset by declines in transportation and professional services. Hires and total separations held steady at 5.1 million each, pointing to a labour market that remains stable but lacks momentum.

Eurozone annual inflation accelerated to 3.3% in August, the highest since September 2023 and well above the ECB's 2% target, as energy inflation surged to 14.3% on continued West Asia fighting. Services inflation eased to a four-month low of 3.0% and core inflation edged down to 2.4%, though markets are fully pricing a 25 basis point ECB hike this month.

Australia's economy grew 0.4% quarter-on-quarter in Q2, above estimates of 0.3% and accelerating from Q1's 0.3%, supported by private demand and stronger mining exports.

Takeaway: Slowing US manufacturing momentum and soft job openings point to a gradually cooling domestic economy, while surging Eurozone energy inflation locks in an ECB rate hike and keeps global monetary tightening firmly on the agenda. Australia's steady growth offers a brighter spot in the Asia-Pacific outlook.

WHAT HAPPENED OVERNIGHT

US stocks fall sharply as oil spike, bond selloff, and hawkish Fed create perfect risk-off storm

The Dow fell 0.79%, S&P 500 lost 0.71%, and Nasdaq dropped 1.03%, as September began with its historically worst-month reputation intact, with all three indexes closing decisively lower.

Fresh US airstrikes on Iranian targets around the Strait of Hormuz drove crude higher, while Bessent said Washington would announce new bank sanctions to "economically asphyxiate" Tehran, with Iran warning it would prevent Gulf oil exports.

Global sovereign debt yields rose to multi-year highs as markets priced accelerating central bank tightening across major economies.

Energy was the sole S&P 500 sector to gain, while consumer discretionary suffered the largest loss and the Dow Jones Transportation Average slid 2.5%, signalling economic growth concerns.

The Philadelphia Semiconductor Index dipped 2.1%, with every constituent closing lower.

US Treasury yields climb above 4.8%, approaching highest since October 2023, as oil surge fans Fed hike bets

The 10-year yield pushed above 4.8% as oil advanced for a third straight session on escalating US-Iran hostilities, amplifying inflation concerns heading into the September Fed meeting.

September hike odds rose to 70% as Warsh's inflation-fighting commitment was reinforced by Fed Governor Barr's warning that the Fed should be prepared to raise rates if inflation fails to ease.

ADP employment data due Wednesday and Friday's nonfarm payrolls are the next key inputs for the Fed's policy decision.

US Dollar extends rebound above 99.6 as hawkish Fed signals and energy inflation risks drive yields higher

The dollar index climbed further from its August 21 three-month low of 98.8, tracking yield gains across the curve as renewed US-Iran attacks dimmed near-term Hormuz reopening prospects.

Rising energy prices added to inflationary pressure following hawkish warnings from Warsh and other FOMC members, with Warsh also noting the labour market is running at or near full employment.

Annual nonfarm payroll revisions came in well below recent downgrades, reinforcing the robust employment backdrop underpinning the case for tightening.

Stronger Eurozone inflation data added to ECB rate hike consensus, limiting the dollar's broader rebound against the euro and capping the DXY's recovery.

Oil surges over 4% to five-week high as renewed US-Iran fighting deepens supply disruption fears

Brent settled at $94.65/bbl, up 4.6%, and WTI at $90.22, up 5.2%, their highest closes since July 24 and July 23 respectively, as US forces struck IRGC targets following alleged attacks on Hormuz shipping and US troops.

Tehran warned it would prevent Gulf oil exports despite Trump's threat to hit Iran "hard" and Bessent's warning of imminent new sanctions, with the exchange quashing hopes the weekend's flare-up would remain contained.

US diesel futures hit a 52-month high after surging 51% over the past 10 weeks, pushing the diesel crack spread to a record ~$107/bbl on global refinery disruptions in the West Asia and Russia.

Two tankers were reported hit while leaving the Strait of Hormuz, adding to supply disruption concerns as Iran effectively maintains its closure of the waterway.

Russian air attacks killed 12 people in Kyiv and surrounding regions in the sixth straight day of intense strikes on the Ukrainian capital, adding further geopolitical risk premium.

Analysts estimate US crude stocks fell 0.8 million barrels last week, which would be the first draw in five weeks and well below the five-year average decline of 5.1 million barrels for the period.

Day’s Ledger*
Economic Data 

Russia July GDP

US August ADP Nonfarm Employment Change

Canada BoC Interest Rate Decision

US Crude Oil Inventories

Corporate Actions 

Earnings: Technocraft Ventures Limited

Shalibhadra Finance Limited to consider dividend

Policy

BOC Press Conference

Tickers to Watch

RELIANCE INDUSTRIES RCPL enters India's ice cream market with launch of Bombay Creamery, featuring cones, cups, tubs, bars and sticks starting at ₹10, positioned around "Global Quality at Affordable Price."

HERO MOTOCORP Domestic dispatches up 4.5% YoY to 5,42,305 units in August 2026, aided by stronger scooter sales offsetting motorcycle decline; vs 5,19,139 units a year ago.

ADANI GREEN ENERGY Commissions 139 MW solar project at Khavda, Gujarat, via subsidiary Adani Green Energy Twenty Six A, taking operational renewable capacity to 20,280.8 MW; battery storage capacity at 3,551 MWh.

ASHIANA HOUSING Reports August area bookings of 1.67 lakh sq ft, valued at ₹1.7 billion.

WIPRO Renews Digital Workplace Services contract with ABB, continuing AI-enabled digital workplace services across ABB's global operations with focus on automation and workplace modernisation.

GLAND PHARMA USFDA concludes GMP inspection at Visakhapatnam facility (August 24-September 1) with zero Form 483 observations.

L&T FINANCE Gets perpetual IRDAI registration to operate as Corporate Agent (Composite), effective August 31, 2026.

NMDC August production rises to 4.07 MT from 3.37 MT a year ago; sales at 3.58 MT vs 3.39 MT.

ARSS INFRASTRUCTURE PROJECTS Secures order worth ₹1.31 billion from East Coast Railway.

UJJIVAN SMALL FINANCE BANK RBI approves appointment of Carol Furtado as Interim CEO for three months, effective September 1, 2026.

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(*Compiled from various media sources)

See you tomorrow with another edition of The Morning Edge.

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