Stock markets in Australia, Japan, Hong Kong, Singapore and South Korea fall after Iran’s attack on Israel.
However, while Israel called the attack – which Tehran said was in response to an earlier strike on its Syrian embassy – an escalation of hostilities, analysts said there was hope among traders that the crisis could be contained.
That sliver of optimism helped drag oil prices lower.
Saturday’s bombardment of more than 300 ballistic and cruise missiles as well as attack drones – which were mostly repelled by air defences – compounded worries about the outlook for United States interest rates following more forecast-beating inflation and jobs data.
Iran told the United Nations the strike was a “legitimate” defensive response to the attack in Damascus on April 1, which killed seven members of Tehran’s Revolutionary Guard, including two generals.
It added on social media that “the matter can be deemed concluded” but warned that “should the Israeli regime make another mistake, Iran’s response will be considerably more severe”.
Israeli military spokesman Daniel Hagari said it was “a severe and dangerous escalation”.
But experts said the limited scope of the attack showed Iran was seeking to make a show of strength with its attack, without leading to a conflict.
Meanwhile, US President Joe Biden was reported to have cautioned Israeli Prime Minister Benjamin Netanyahu to “take the win” and forego a counterattack.
Still, Saxo’s Redmond Wong said: “All eyes remain on whether there will be any response from Israel and markets will likely be volatile in the day ahead to any geopolitical headlines.”
Asian markets mostly fell on Monday, though they pared their initial big losses.
Tokyo, Singapore, Mumbai, Taipei and Manila were at least 1 percent down, while there were also losses in Hong Kong, Seoul, Sydney and Wellington.
Shanghai rose by more than 1 percent after China on Friday unveiled new market regulatory measures, which one analyst said could help its long-term performance.
US futures rose, having dropped sharply on Friday as investors went nervously into the weekend.
“The muted market response likely stems from the highly intricate sentiment in the market at this stage,” said the IG Group’s Hebe Chen.
“Market participants are certainly not giving up hope that the past weekend’s events were just a one-off occurrence, while holding their breath for what could happen next.”
With worries about an escalation subsiding for now, oil prices dipped, though observers warned they could spike back above $100 if the crisis worsens.
“This war may move down the escalation ladder if the Israeli government follows the advice of the White House and forgoes retaliatory action,” said Helima Croft at RBC Capital Markets.
The broadly risk-off mood sent the US dollar up against its major peers while dimming hopes for US interest rate cuts helped it push to a new 34-year high against the yen, putting Japanese officials in the spotlight after they said they were ready to step in to support their currency.