Asia stocks slide as oil fears overshadow Fed’s hold

[SINGAPORE] Markets in Asia were broadly in the red on Thursday (Mar 19) following the US Federal Reserve’s overnight decision to hold interest rates steady as concerns over the rising oil price took centre stage.

In a move that had been widely anticipated, the Federal Open Market Committee voted 11-1 to keep the benchmark federal funds rate anchored in a range between 3.5 and 3.75 per cent.

But attention soon shifted to energy markets with Brent crude piercing US$112 per barrel in Asian trading as escalating strikes between Iran and Israel hit critical energy infrastructure.

This has clouded the inflation outlook and the case for policy easing later this year.

Jean Boivin, head of the BlackRock Investment Institute, remarked: “Even though the Fed policy rate guidance looks unchanged, we think it is clear that the case for further rate cuts has weakened considerably.”

He added: “How important the energy shock is to Fed policy will depend on how long energy prices stay high.”

As at 2.30 pm, Singapore’s Straits Times Index was down 0.7 per cent, while Hong Kong’s Hang Seng Index shed 1.8 per cent.

South Korea’s Kospi declined 2.7 per cent while Japan’s Nikkei 225 lost 3.5 per cent. FTSE Bursa Malaysia KLCI bucked the trend, gaining 0.2 per cent.

Gold retreated to about US$4,800 as safe-haven demand gave way to liquidation, noted Vishnu Varathan, head of macro research, Asia ex-Japan at Mizuho Securities (Singapore).

Energy prices in the spotlight for Asia

Analysts said markets are turning their attention towards the war’s duration and its potential to stifle growth and drive inflation.

Nigel Green, chief executive officer of deVere Group, noted that the geopolitical backdrop has shifted the policy landscape “sharply”. “Energy is now the dominant macro driver again,” he added.

Similarly, Stephen Innes, managing partner at SPI Asset Management, described the combination of higher oil prices, rising US yields and a stronger US dollar as a “wrecking ball” for Asian assets and currencies.

He noted that Asia is particularly exposed as it imports Brent-linked crude and Middle East blends rather than West Texas Intermediate (WTI). Innes said that as the price spread between Brent and WTI widens amid geopolitical escalations, Asia “effectively pays a premium for instability, while the US sits partially insulated by its domestic pricing structure”.

“The same barrel shock hits Asia twice, once through higher outright prices and again through the widening spread that amplifies the cost of imported energy,” Innes added.

Adjusting rate cut expectations

As elevated energy costs fuel inflation fears, analysts have shifted the debate from when the Fed will cut rates to if they will at all.

Dr Boivin of BlackRock said: “We thought that the Fed could still get lucky in 2026 and get cover for further cuts. But the window for that scenario is closing.”

Similarly, deVere’s Green said: “September, or more likely October, is now the realistic opportunity for a rate cut, and even that is far from guaranteed.”

Green added that investors must abandon the assumption that rate cuts are just around the corner. “The real story is not delayed cuts. It’s the possibility of no cuts for longer than markets are currently expecting.”

Despite this, Kerry Craig, global market strategist at JP Morgan Asset Management, maintained that the base case remains for a “good pace” of US and global growth. While this would support the outlook for risk assets, he acknowledged that “the tails to this view are now fatter”.

To manage these risks, Craig said maintaining a well-diversified portfolio across public and private markets is the “best strategy” to navigate uncertainty.

“With markets repricing across bonds and equities, this environment creates opportunities for active management to capitalise on price dislocations,” said Craig.