Asian equities fell sharply at the start of the week as investors reacted to a combination of weaker risk appetite in the United States, a stronger dollar and rising oil prices. The pullback in US technology shares at the end of last week and renewed concerns over the Middle East conflict encouraged traders to reduce exposure to regional stocks.
Japanese shares led the decline. The nikkei 225 fell 3.6% to around 64,200 after briefly showing signs of stabilization. In South Korea, the KOSPI dropped 4.5% to near 7,800 and triggered a temporary trading halt after plunging more than 8% in early trade. Chipmakers were hit especially hard, with Samsung Electronics and SK Hynix each falling by more than 10%, dragging the broader index lower. Mainland Chinese and Hong Kong markets also weakened, with the Shanghai Composite and Hang Seng each down about 0.8%.
Indian markets are also expected to open lower. Futures tied to the Nifty indicated a decline of nearly 300 points, pointing to a negative start for domestic equities.
The sell-off in Asia followed a sharp decline in US technology stocks on Friday, when stronger-than-expected employment data fueled a rise in Treasury yields and the dollar. The stronger labor report reinforced expectations that the Federal Reserve may keep policy restrictive for longer, or even raise rates again this year. Market pricing now reflects a materially higher chance of at least one rate increase compared with last week.
At the same time, fresh fighting between Israel and Iran has lifted crude prices. That trend is a particular concern for Asian economies, many of which depend heavily on imported energy. Higher oil costs can pressure inflation, worsen trade balances and add to the case for caution in regional equity markets.The US Dollar Index held near 100 on Monday in Asian trading, remaining close to a monthly high as investors weighed renewed tensions in the Middle East and a stronger outlook for US interest rates. The gauge, which tracks the dollar against a basket of six major currencies, was little changed around 100.10.
Sentiment toward the dollar improved after Israel said it struck military targets in western and central Iran following a missile barrage launched by Iran at northern Israel. Reports of explosions in several Iranian cities added to concerns that the confrontation could broaden. In periods of elevated geopolitical risk, investors often shift toward the dollar as a relatively safe asset, supporting the currency against peers.
Expectations for tighter US monetary policy also helped underpin the dollar. The latest employment report showed the US labor market remained resilient in May, with nonfarm payrolls rising by 172,000, above economists’ expectations and enough to reinforce the view that growth is slowing only gradually. The unemployment rate was unchanged at 4.3%, suggesting conditions remain stable despite ongoing pressure from higher energy prices.
Market pricing has adjusted quickly in response. Futures now imply more than a 70% chance of a Federal Reserve rate increase in December, compared with roughly 45% a week earlier. That shift reflects growing confidence that persistent labor market strength could give policymakers room to tighten again later in the year.
Economists have argued that the combination of firmer employment data and the energy shock linked to Middle East unrest may push the Federal Reserve toward additional action. Some now expect two quarter-point increases before year-end, as officials seek to contain inflation risks while the economy continues to show underlying resilience.
