oil refinery Traders have been on edge since Saturday's barrage by Iran. File picture: Waltraud Grubitzsch / dpa Picture-Alliance via AFP.
Oil prices rallied and equities sank in early trade on Friday as reports said explosions had been heard in Iran and Syria, fuelling fears of an escalation of the Middle East crisis after last weekend's missile attack on Israel by Tehran.
The reports followed another batch of data indicating the US economy remained in rude health and compounded concerns that the Federal Reserve will hold off cutting interest rates this year or even hike them again.
Traders have been on edge since Saturday's barrage by Iran, which Israel's army chief General Herzi Halevi warned would be met with a response.
Leaders in Tehran said the strike was a legitimate response to a deadly attack on an Iranian embassy building in Damascus that it blames on Israel.
Iran state TV said three blasts had been heard near central Isfahan, the site of a key nuclear facility. Tehran had earlier said it could revise its nuclear policies if Israel threatened to attack its sites.
The Mehr news agency also said that "flights to Tehran, Isfahan and Shiraz, and airports in the west, northwest and southwest have been suspended".
Israel's military said sirens sounded in the country's north.
The news sent shivers through markets, with both main oil contracts surging more than three percent on worries about supplies from the crude-rich region, while fears of a regional conflict saw equities tumble.
Tokyo, Seoul and Taipei each plunged more than three percent, while Hong Kong and Sydney were off more than one percent.
There were also losses in Shanghai, Singapore, Wellington, Manila and Jakarta.
The rush for safety also saw the yen rally against the dollar and gold jump more than one percent past $2,400, while US Treasuries climbed.
"It is now clear that the escalating shadow warfare between Israel and Iran... has finally ignited the powder keg in the Middle East, and we have moved decisively out of the shadows and into the glaring light of open conflict," said Stephen Innes of SPI Asset Management.
"It should be noted that this is not a staged response to an Iranian drone attack but rather an indication that we have entered a new phase of this conflict, one that is likely to have significant and far-reaching consequences for Middle East peace and least of all risk markets."
The mood among traders was already downbeat as they contemplated the prospect of the Fed staying pat on interest rates this year following data showing jobless claims came in below expectations while a gauge of business activity hit a two-year high.
Meanwhile, Atlanta Fed boss Raphael Bostic said inflation is "too high" and he felt there was no need to cut borrowing costs until later in the year.
"I'm comfortable being patient," he added.
New York Fed chief John Williams and governor Michelle Bowman also said they saw fewer reductions than expected, if at all, this year.
Michael Landsberg, of Landsberg Bennett Private Wealth Management, said: "We are firmly in the camp of no rate cuts in 2024.
"We believe investors should prepare for a higher-for-longer regime when it comes to both inflation and interest rates."
Key figures around 02:30am GMT (4:30 SA time)
AFP
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