Global financial markets woke up on Tuesday to a sudden military and field escalation in the Middle East, following the announcement by the US Central Command (CENTCOM) of carrying out strikes targeting Iranian missile sites and boats in the Strait of Hormuz.
The move on the ground has upset recent optimism about US President Donald Trump's de-escalation negotiations, plunging investment assets into "geopolitical confusion" and putting investors at a crossroads between anticipating a peace deal that ends tensions and widening "uncertainty" as the most prominent driver of energy and currency prices.
Energy Markets: Oil Recoups Losses and Heads Above $98
In the energy sector, oil prices bounced upwards , recouping much of their sharp losses in the previous session.
Benchmark Brent crude futures climbed 1.6% to trade above $98 a barrel, after falling more than 7% on Monday following a post by President Trump in which he suggested the talks were "going well".
U.S. West Texas Intermediate crude rose to settle near $92 per barrel.
The reversal comes amid an assessment by traders of the fragility of the ceasefire and the chances of reopening the Strait of Hormuz, which remains effectively closed and under a mutual blockade from Washington-Tehran, despite ongoing negotiations to extend the truce for nearly two months.
Precious metals and currencies: Gold falls, dollar shows strength
On the precious metals prank, the military escalation caused a sharp and sudden decline in gold prices.
The ounce fell by about $50 (down 0.6%) to $4,545 an ounce, driven by Israel's promises to intensify strikes against Hezbollah in Lebanon, which Tehran lists as a prerequisite for the success of any deal.
The US dollar, on the other hand, rebounded strongly against all G10 currencies, benefiting from safe-haven inflows.
The dollar's rally has put Asian currencies under heavy pressure, with the Indonesian rupiah continuing to bleed near historic lows of 17,800 rupiah per dollar on concerns about imported inflation and a fragile trade balance.
In the overseas market, the Chinese yuan also fell to 6.78 against the dollar after earlier record gains, while the Indian rupee eased slightly to settle near 95.4 against the dollar.
Equities and Monetary Policy: Asian Divergence Awaits the Interest Rate Path
In equity markets and monetary policy, Asian markets showed a marked divergence in dealing with the crisis, with Indonesian stocks rising 0.4% supported by the central bank's recent decisions to raise interest rates to curb inflation.
In Japan, the economic activity index improved slightly to 116.4 points. Meanwhile, Bank of Japan Deputy Governor Ryuzo Himino reiterated the bank's commitment to the path of gradual interest rate hikes, adding that the timing of this measure remains dependent on the extent to which the Japanese economy and supply chains are affected by the current geopolitical tensions in the Middle East, reflecting the caution of major central banks in managing their monetary policy amid a global "uncertainty" environment.