Concerns over Middle East tensions and soaring oil prices have shaken confidence in risk assets. Emerging market currencies and equities experienced significant declines.
Driven by fears of supply disruptions, international oil prices surged sharply. On Monday, Brent crude opened 13% higher, reaching $82 per barrel. Both major crude futures contracts pared some gains after opening sharply higher. At the time of writing, WTI and Brent were trading at $71.4 and $78.4 per barrel, up 7.09% and 7.45% respectively.
An index tracking developing-nation currencies fell 0.6%, marking a second consecutive day of losses, primarily due to a stronger US dollar. The Philippine peso, South African rand, and Thai baht were among the worst performers. Stock markets in South Korea were closed for a holiday. Meanwhile, emerging-market equities fell as much as 1.4%, their largest decline in over three weeks.
Pakistan's stock market plunged heavily. According to a statement from the Pakistan Stock Exchange, the KSE-30 index fell as much as 9.6% during the morning session, triggering a one-hour trading halt. Trading resumed at 10:27 AM local time. By the time of writing, the KSE-30 index had fallen 10%, triggering another circuit breaker.
Simultaneously, protests in support of Iran erupted in multiple locations across Pakistan. Bilal Khan, Head of International Equity Sales at Karachi-based brokerage Arif Habib, stated, "The overall tension in the Middle East, coupled with domestic protests supporting Iran, has caused the market to fall sharply." He added that "investors expect some buying to emerge later in the day" as most indecisive investors had already exited their positions.
Furthermore, tensions between Pakistan and Afghanistan are escalating. Cross-border strikes have been launched, affecting the Afghan capital and resulting in at least several hundred casualties. Pakistan has announced an "open war" status with Afghanistan.
Ali Raza, Head of International Equity Trading at BMA Capital Management, suggested that large-scale forced liquidations of leveraged retail accounts by brokers appeared to have intensified the sell-off.
Against the backdrop of high oil prices and a strong US dollar, the central banks of Indonesia and India intervened in the foreign exchange market. The Indonesian rupiah fell as much as 0.4% on Monday to 16,845 per US dollar, its largest drop since January 29. The Indian rupee fell as much as 0.5%, its biggest decline since February 6.
Erwin Hutapea, Executive Director of Money and Securities Portfolio Management at Bank Indonesia, stated that the central bank would continue to intervene via the spot market and non-deliverable forward (NDF) markets, covering both onshore and offshore markets.
Traders in Mumbai revealed that the Reserve Bank of India was also making small-scale interventions to support the rupee. These traders requested anonymity as they were not authorized to speak to the media.
Barclays noted in a report that rising oil prices would pose further challenges to Indonesia's fiscal position, especially as global investors and credit rating agencies increase their scrutiny. In a separate report, Barclays strategists indicated that an oil supply shock would negatively impact most Asian currencies, reflecting economic setbacks and deteriorating current account balances. Among Asian currencies, the South Korean won, Singapore dollar, and Indian rupee are relatively more vulnerable to such a shock.
Inflation concerns are mounting. The escalating situation involving Iran, which is spreading across the region, is impacting multiple industries including oil, shipping, and air travel.
Brent crude prices surged to their highest level in over a year before retreating. Concurrently, the US dollar and gold prices rose significantly as investors flocked to safe-haven assets, further pressuring emerging market currencies and heightening inflation worries.
The impact of US-Iran conflict on commodity markets far exceeds previous incidents involving Venezuela or even the Red Sea crisis. A prolonged closure of the Strait of Hormuz, a critical global energy chokepoint, could fundamentally rewrite global inflation dynamics.
Danish container shipping group Maersk announced it would "pause all vessel transits through the Strait of Hormuz until further notice," adding that "the safety of our crew, vessels, and customer cargo remains our top priority." A Shell source stated that safety remains the primary concern after a supertanker chartered by the company halted its voyage.
Analysis of shipping data shows over 150 tankers anchored near the Strait and along the coasts of major Gulf oil producers, with more vessels waiting on the opposite side. Reportedly, insurers have temporarily halted providing coverage for ships transiting the area.
Increasing the risk of passage through the Strait significantly, even without a physical blockade, could raise shipping costs, particularly insurance premiums. Some war risk insurers have reported that premiums for vessels in the region could rise by up to 50% in the coming days. This scenario is considered highly impactful, potentially restricting global supplies of oil and liquefied natural gas (LNG).
Analysis suggests that oil prices surging to $100 per barrel would have a "material impact" on global inflation. Higher oil prices would inevitably increase costs for refueling vehicles, as well as raise expenses for transportation, manufacturing, and logistics. This would further squeeze consumer budgets and exacerbate the fragility of the global economy, already strained by trade tensions.
On March 1, eight OPEC+ oil-producing nations, including Saudi Arabia and Russia, held a video conference. The countries decided to implement an adjustment increasing production by 206,000 barrels per day starting in April 2026. This figure significantly exceeded the market's general expectation of 137,000 barrels per day, reflecting producers' alertness to potential supply risks. However, analysis indicates this symbolic production increase is unlikely to soothe market anxieties in the short term.
Citigroup stated that while Iran's constitutional succession mechanism might help maintain regime stability and prolong the conflict, sustained supply disruptions would broadly increase inflation risks in emerging markets. This would intensify currency pressures on countries with weak foreign exchange reserves and also pose challenges for Gulf Cooperation Council economies already facing missile attacks, airspace closures, and shipping disruptions. Against a backdrop where markets have priced in lower producer price index expectations and policy rate cuts, such a shock could cause inflation expectations in emerging markets to spiral out of control rapidly. Countries with insufficient foreign reserves, such as Argentina, Sri Lanka, Pakistan, and Turkey, face risks of sudden capital outflows and intensified currency depreciation.
Goldman Sachs pointed out that rising oil prices generally have a negative impact on emerging market economies. Although emerging economies often rely more on commodity exports than developed nations, their commodity consumption constitutes a higher proportion of GDP, making them more susceptible to the indirect shocks that oil price increases inflict on global economic growth.
