Asia stocks climb, oil jumps on Israel-Iran conflict

Stock markets in Asia moved higher at the start of trading on Monday, pulling back some of their losses from the end of last week. Oil prices surged as the conflict between Israel and Iran continued to escalate.

The Nikkei 225 index was up around 0.8%, leading gains in the region. A broad gauge of Asian stocks gained 0.2%. US equity futures were also higher, after reversing earlier losses. Brent crude rose as much as 5.5% in early trading.

Stocks had tumbled on Friday as investors reacted to reports that Israel had launched airstrikes against Iran, and the conflict between the two escalated over the weekend with a series of attacks from both sides. But investors in Asia have quickly shifted focus back to news closer to home.

“Unless oil stays elevated and drives inflation higher, this is more likely a pause than a panic as other narratives are driving the market,” said Dave Mazza, chief executive officer, Roundhill Investments. “It may present a buying opportunity, but with markets having rallied sharply off recent lows, gains from here will be harder to come by.”

Japanese equities were helped by a mix of a weakening yen, which may boost companies with overseas revenues, and a rally in defense companies after reports that Japan and the EU would meet to discuss cooperation measures for the defense industry. The yen was around 0.2% weaker against the dollar.

Still, there is plenty of uncertainty for markets at the moment. A major concern is that the conflict leads to a prolonged disruption to the supply of oil. That could weigh on the global economy and potentially fuel a round of inflation just as many central banks pivot toward easing.

“Markets should be prepared for a prolonged period of uncertainty,” said Wolf von Rotberg, an equity strategist at Bank J. Safra Sarasin. “Hedging against potential oil supply-chain disruptions via exposure to the energy market and adding to gold, which may see an acceleration of its structural uptrend, are the best ways to protect a portfolio against a further escalation in the Middle East.”

The Federal Reserve and the Bank of Japan are among a raft of central banks set to announce interest rate decisions this week.

Investors are also looking ahead to economic data from China on Monday morning. Industrial production and fixed-asset investment probably held steady in May, according to the median estimates of economists surveyed by Bloomberg. But retail sales growth, a key gauge of consumption, probably slipped below 5%, with a contraction in property investment deepening further.