The Australian stock market experienced a significant downturn at the start of trading on Friday, plummeting by 1.4 percent and erasing $40 billion in value. The ongoing conflict in the Middle East has sent shockwaves through global financial markets.

The ASX 200 index has now dropped over four percent since the onset of the conflict.

Should this week’s decline persist, it could mark the steepest fall since a 4.2 percent drop caused by an unexpected interest rate hike from the Reserve Bank of Australia (RBA) in May 2022.

In tandem, rising bond yields have led investors to anticipate more than two interest rate increases by the RBA this year. Moreover, all of the major banks are predicting another rate hike in May.

Kyle Rodda, a senior market analyst with Capital.com, shared insights with the AFR, stating, “The risk of a continuing and intensifying supply shock that significantly disrupts energy markets and results in higher inflation and weaker economic growth has increased.”

Should there be two additional 0.25-point rate hikes by the RBA, it would translate to an estimated $180 monthly increase in repayments for a $600,000 mortgage with 25 years remaining, according to Canstar’s calculations.

On Wall Street, the S&P 500 slipped 0.6 per cent, leaving its total fall since the conflict began just under one per cent.

Oil prices remain high after Iran denied rumours its officials had sought de-escalation via diplomatic backchannels and on reports of fresh Iranian air strikes on Israel.

The ASX 200 has now slumped more than 4 per cent since the war began

Surging bond yields have pushed investors to bet on more than two RBA rate hikes this year. Pictured: Reserve Bank governor Michelle Bullock

Iran has effectively shut down commercial traffic through the Strait of Hormuz, the narrow shipping corridor that carries around 20 per cent of the global oil trade, using drone strikes and explicit military threats to deter vessels, even as the US continues to strike its naval assets. 

In response, US President Donald Trump announced a plan to insure tankers and escort them through the strait, though the initiative is yet to be implemented. 

While US assurances have done little to curb surging crude prices, markets were lending credence to talk of de-escalation, IG market analyst Tony Sycamore said. 

‘They’ve been absolutely pummelled and it certainly makes sense to put the feelers out to find where the off-ramp or de-escalation point is,’ he said.

‘And if you were one of the part of the regime which reached out to find out where the US is on this situation, you’re probably not going to admit it, but it could also be the US putting it out there to calm everybody down, so we really don’t know.’

If the conflict escalates and oil supply remains disrupted, Australians could see petrol prices reach $3 per litre. 

If the disruption is limited to Iran’s own production, about four per cent of global supply, oil prices could rise another US$25 a barrel to around US$100.

But the greater risk lies in the continued closure of the Strait of Hormuz.

If shipping is disrupted for a month, Westpac warns Brent crude could spike to US$113 a barrel. In a severe scenario where the strait remains blocked for three months or longer, prices could surge to US$185 a barrel.

‘The longer and more intense the disruption, the greater the real economy cost and hit to sentiment,’ Westpac said.

Aussies could face fuel prices of up to $3 a litre if the conflict rages on

For Australian motorists, that could mean petrol prices rising between 25 cents and $1 a litre, depending on the Australian dollar and refinery margins. At the top end of that range, fuel could exceed $3 a litre in many cities.  

Adding to market pressures, China has set its lowest economic growth target in decades, 4.5 to 5 per cent, threatening to hit Australian mining companies hard. 

China buys about 70 per cent of Australia’s iron ore exports and remains the country’s largest trading partner.

This year’s target is the lowest since 1991, according to AFP research, with the only exception being 2020 when no target was set during the Covid‑19 shock.