Middle East tensions rise, oil prices surge ending three-day decline, Asia-Pacific stocks rebound, South Korea index jumps over 3%

The renewed tensions in the Middle East have driven a significant rebound in oil prices. Asia-Pacific stock markets, overall, strengthened, led by gains in the semiconductor sector; however, market sentiment remains weighed down by the upcoming Federal Reserve interest rate decision and pressure from the rotation among technology stocks.

On Wednesday, according to China Central Television News, the U.S. Central Command announced the successful interception of Iran's ballistic missile attack against U.S. forces stationed in the Middle East. Brent crude oil surged more than 3% in response, ending a three-day losing streak.

Meanwhile, the Korean KOSPI index’s gains expanded to over 3% at one point, with SK Hynix rising sharply due to a 557% year-over-year surge in quarterly profits, making it one of the standout performers in the Asia-Pacific region.

This Iranian attack has redirected market attention back to the Strait of Hormuz, as the risk of energy supply disruptions makes the inflation outlook increasingly complex—coinciding with this week’s anticipated Federal Reserve rate decision, adding further uncertainty. On the technology side, the Nasdaq 100 index has declined for five consecutive trading days—the longest losing streak since January this year. The Philadelphia Semiconductor Index fell 4.5% on the day and is projected to post its worst monthly performance since 2002.

Brent crude oil rose 3.4% to about $87 per barrel, while WTI crude futures climbed roughly 4% to around $82 per barrel, ending a three-day decline—during the prior brief easing period, Brent crude posted its largest three-day loss since April 2020.

The immediate catalyst for the oil price rebound was a statement released by U.S. Central Command. According to China Central Television News, on the 28th local time, U.S. Central Command stated that at 5:45 PM Eastern Time, the Islamic Revolutionary Guard Corps of Iran launched several ballistic missiles from within Iran, “attempting to launch a surprise attack on U.S. forces stationed in the Middle East.”

TD Securities Senior Commodity Strategist Ryan McKay said, “We remain cautious about any potential agreement that fails to specifically address the Strait of Hormuz, as previous disagreements over control of this strait have led to Iranian escalations and the premature collapse of prior memorandums of understanding.”

Bank of America downgraded Exxon Mobil to “neutral” even before the latest escalation, citing the risk of further declines in oil prices should the U.S. and Iran reach a ceasefire. At the same time, about 20% of Exxon’s global output is at risk as it is dependent on uninterrupted access through the Strait of Hormuz, limiting upside potential as well.

The rebound was broad-based across Asia-Pacific equity markets. Korea’s KOSPI index rose more than 3%, fuelled by SK Hynix’s explosive 557% surge in quarterly earnings; Samsung Electronics gained nearly 3% as well.

The Nikkei 225 advanced by about 1%, Australia’s S&P/ASX 200 gained approximately 0.8%, and the MSCI Asia Pacific Index as a whole rose 0.7%.

Meanwhile, Nasdaq 100 futures fell as much as 0.6% following news of the attack before turning positive, while S&P 500 futures were up about 0.4%.

Partial bright spots in the Asia-Pacific market could not conceal the broader adjustment pressure facing the tech sector. After falling 4.5% on Tuesday, the Philadelphia Semiconductor Index is set for its worst monthly performance since 2002; this comes just after it recorded its strongest-ever quarterly gain. Micron Technology and Sandisk were among the biggest decliners in the S&P 500 on Tuesday.

Vikram Rai, portfolio manager at First New York, noted that the divergence between the S&P 500 and the Nasdaq 100 “reflects a rotation of money out of chip stocks,” and commented that the Nasdaq 100 “cannot advance if semiconductors and memory stocks fail to rally.”

Joseph Brusuelas, chief economist at RSM, described the current market as “marked by moderate risk-off sentiment ahead of the Federal Reserve policy decision and a flood of major earnings reports.” He pointed out that if not for rising market concerns about AI competition and the profitability outlook for the technology ecosystem, investors might “be more willing to deploy capital.”

The market currently prices the probability of the Federal Reserve holding rates steady this Wednesday at about 70%, with the current target range at 3.5% to 3.75%.

Analysts at JPMorgan believe the probability of a rate hike is “likely lower than the current market pricing of about 30%,” noting that “while inflation remains elevated, there is no risk of a further breakout.” They put the odds of a “hawkish hold” at 50%, expecting the Fed, while staying alert, to also take into account recent trends in energy prices as a signal of easing inflation pressures.

Julia Hermann, global market strategist at New York Life Investment Management, warned, “We think the market is assigning too much weight to inflation risk and underappreciating the economic cost of further tightening,” adding that if the Fed takes a more hawkish stance, “the most impacted will be currently very vulnerable leading sectors, not the broader market.”

Earnings season enters a critical window this week. Microsoft and Meta will report results after the close on Wednesday, with Apple and Amazon following on Thursday.

Meanwhile, some positive signals emerged. Ford Motor beat Wall Street expectations for the quarter and raised its full-year guidance for the second time, buoyed by strong sales and higher prices for high-margin SUVs. Its shares rose around 4% in after-hours trading.

Additionally, according to Bloomberg, Nvidia CEO Jensen Huang publicly defended open-weight AI systems, calling them essential for advancing the AI industry. Meta and BlackRock plan to jointly build a data center complex in Texas costing about $14 billion with a capacity of up to 1 GW.

To be updated