Middle East war: Oil price rises, ASX shares plunge $56b, interest rates heading to 4.85pc

Shares plunged 1.8 per cent on Monday morning to wipe $56 billion off the local market, heading for its fourth straight week of losses and a 10 per cent correction since the Middle East war erupted on February 27.

Heavyweight miners including BHP, Rio and Northern Star led the losses as gold and copper prices extended huge falls since the war started to take push the S&P/ASX 200 Materials sector into a 23 per cent fall equal to a bear market since its March 2 peak of 25,835 points.

Across the share market every sector traded lower, except energy, as investors sold risk assets exposed to a global economic downturn in exchange for the safety of cash.

On Monday morning, Westpac Bank said interest rate traders expect the Reserve Bank will need to raise the cash rate three more times to a peak of 4.85 per cent to tame inflation, which is forecast to reach 4.5 per cent to 5 per cent this year.

At Monday’s open in Asia, Benchmark Brent crude futures rose 1 per cent to $US107.47 a barrel. Base metals silver, platinum, copper and palladium all extending huge falls from last week.

“The market is becoming increasingly worried this conflict could become a protracted affair, broader in nature and structurally inflationary,” said National Australia Bank’s economics team.

“(Over the weekend) evidence mounted that the conflict was escalating rather than de‑escalating. Iran continued attacks on neighbouring Gulf states, while the IEA warned the war represents the greatest global energy security threat in history, with oil and gas infrastructure likely to take six months or longer to return to operation.”

The war appears to be entering a new phase. On the weekend US President Donald Trump threatened to hit Iran’s power grid if the Strait of Hormuz was not reopened. Iran Deputy Foreign Minister Kazem Gharibabadi said they would respond in kind to any attack on critical infrastructure.

Mr Trump set a two-day deadline for Iran to reopen the Strait of Hormuz, warning that failure to do so would result in attacks on the country’s power plants.

Mr Trump used Truth Social on Sunday to signal a major escalation in the ongoing conflict.

“If Iran doesn’t FULLY OPEN, WITHOUT THREAT, the Strait of Hormuz, within 48 HOURS from this exact point in time, the United States of America will hit and obliterate their various POWER PLANTS, STARTING WITH THE BIGGEST ONE FIRST! Thank you for your attention to this matter,” he posted.

In response, Iran said it would close the vital waterway “completely” and strike energy, information technology, and desalination infrastructure if its power facilities were targeted.

Bonds lose value

The worries that inflation is set to jump have sparked a global sell-off in government bonds, increasing borrowing costs for already heavily indebted nations. Australian

“There was a clear shift last week in investor expectations regarding the impacts and duration of the conflict,” said Daniel Hynes, a strategist at Australia and New Zealand Bank.

Australian 1-year and 10-year government bonds now offer their highest yields since 2011, with the yields on UK government bonds at their highest level since the Great Financial Crisis in 2008.

In Canberra, International Energy Agency executive director Fatih Birol is scheduled to speak to the National Press Club, and may take questions about the risk of oil supply disruptions to Australia.

More to come.