Just days after former US President Donald Trump declared that peace talks between Washington and Tehran were “largely negotiated,” a sudden escalation of hostilities between the two powers sent shockwaves through global financial markets on Thursday, triggering a $45 billion wipe-out of Australian equities and a sharp jump in international crude prices.
The escalation began when the US launched targeted strikes near Iran’s Bandar Abbas port Wednesday, reportedly targeting the head of the Islamic Revolutionary Guard Corps Navy. The following day, the US confirmed it had shot down four Iranian drones over the strategic Strait of Hormuz and destroyed a Iranian drone control tower. In response, Iran claimed it had carried out a retaliatory strike against a US air base in Kuwait and issued a stark warning of more severe reprisals if US offensive operations continued.
The sudden flare-up of geopolitical risk immediately roiled regional and global markets. For Australian investors, it was one of the toughest trading sessions in recent weeks: the benchmark ASX 200 plunged 124.80 points, or 1.43%, to close at 8592.90, while the broader All Ordinaries index dropped 125.60 points, or 1.40%, to settle at 8819.60. The Australian dollar also weakened against the US dollar, edging 0.16% lower to 71.22 US cents by market close.
Nine out of the 11 tracked market sectors ended the day in negative territory, with only consumer-facing segments bucking the broader sell-off trend. The materials sector, which had enjoyed a five-day winning streak leading into Thursday’s session, led the market declines. Major mining stocks all posted heavy losses: BHP fell 1.19% to $60.55, Rio Tinto dropped 2.53% to $183.46, and Fortescue Metals declined 1.18% to $21.78. Gold mining stocks suffered even steeper falls, dragged down by a 1.83% drop in spot gold prices to US$4373 per ounce: Northern Star Resources sank 7.47% to $18.20, while Evolution Mining closed 7.76% lower at $11.65.
Australia’s major banking group was also caught up in the broad sell-off, with the entire financial sector shedding 1.64% over the session. Commonwealth Bank of Australia led the declines among the big four banks, dropping 2.06% to $161.41, while ANZ fell 1.91% to $34.89, National Australia Bank declined 1.72% to $37.10, and Westpac ended the day down 1.29% at $35.92.
Geopolitical uncertainty drove a sharp rally in global oil prices, as investors priced in greater risk of supply disruptions through the Strait of Hormuz, a critical chokepoint for 20% of the world’s daily oil shipments. Benchmark Brent crude jumped as much as 4.3% to hit US$98.20 per barrel, while US West Texas Intermediate crude rose 2.56% to US$91.70 per barrel. Tony Sycamore, a market analyst with IG, noted that while the US administration has signaled it remains committed to moving forward with peace talks, markets reacted instantly to the escalation. “This reignited inflation and fuel security fears, while also sending bond yields and the safe haven US dollar higher,” Sycamore explained.
Against the broader market downturn, two sectors managed to post gains: consumer staples and consumer discretionary stocks. Australia’s two major supermarket chains led the consumer staples rally: Woolworths added 0.92% to close at $34.94, while Coles Group gained 0.75% to end the session at $21.52. Sycamore attributed this outperformance to a better-than-expected national inflation reading released Wednesday, which showed headline inflation rose just 4.2% – lower than market forecasts. “Capitalising on its defensive qualities and coupled with yesterday’s cooler-than-expected inflation reading — which likely gives the Reserve Bank of Australia cover to keep interest rates on hold at 4.35% next month — the Consumer Staples sector emerged as today’s best performer,” Sycamore said. Even with the market turmoil, Sycamore noted that the US is still widely expected to prioritize de-escalation and work toward ending the ongoing regional conflict, leaving the long-term market outlook for now uncertain.