Middle East war: Oil price rises, ASX nears correction amid Trump ultimatum, interest rates heading to 4.85pc

Shares clawed back heavy losses on Monday to finish down 0.7 per cent at the closing bell, as the local market headed for its fourth straight week of losses and a near 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 push the S&P/ASX 200 Materials sector into a bear market equal to a fall or more than 20 per cent.

As the S&P/ASX 200 closed at 8365.9 points its lowest level since May, one of the only bright spots was the energy sector. It added 1.2 per cent on the day to take its total gain to 20 per cent over the past month. Oil and gas giant Woodside firmed 2.2 per cent to $34.79, at its highest level since October 2023.

Interest rate warning

In the 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 ($153.60) a barrel. Shares across the Asia Pacific fell heavily on worries around the region’s reliance on Middle eastern energy imports, with Japan’s Nikkei 225 Index down 3.5 per cent in the afternoon, and South Korea’s Kospi 200 off 3.4 per cent.

“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.”

War escalates

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.

“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.

At 4.74 per cent on Monday, Australian 1-year bonds now offer their highest yields since the tail end of the Great Financial Crisis in 2011.

Overseas, the yields on UK government bonds hit their highest level since the GFC in 2008. The country has suffered a particular spike in the cost of its shorter-dated debt as worries about the impact of the Iran war rattle its economy. On Friday 1-year UK government debt yielded 4.51 per cent, versus just 3.52 per cent one month ago.