By Abhishek Vishnoi and Winnie Hsu

(Bloomberg) -- Optimism for a quick resolution of the conflict in the Middle East is rapidly ebbing in financial markets.

What just days ago was a tentative wait-and-see trade has flipped into something far more decisive: investors are pricing in a deeper and longer-lasting supply shock — one that could squeeze growth while reigniting inflation. The selling means that about $6 trillion of market value has now been erased from global stocks since war in Iran began.

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Although equities trimmed declines and oil pared gains after the Financial Times reported that Group-of-Seven countries will discuss a possible joint release of petroleum from reserves, Monday’s market moves were still striking.

The shift gathered pace after President Donald Trump said parts of Iran had yet to be attacked and that $100 crude was “a very small price to pay” for “Safety and Peace,” undercutting hopes the conflict would be relatively contained.

As crude surged toward $120 a barrel, traders said it became clear the market was no longer positioned for a short confrontation. Brent crude spiked as much as 29% intraday — its biggest swing in almost six years — while measures of equity volatility jumped and trading volumes across Asian exchanges ran well above monthly averages. The price action bore the hallmarks of capitulation rather than caution.

“The pendulum is swinging toward panic,” Danny Wong, chief executive officer of Areca Capital said by phone. “There is a stampede to sell or pare all kind of risk assets.”

Part of the decline reflects how far markets had run. South Korea and Taiwan had climbed to multi-year highs on insatiable demand for AI chips, leaving valuations stretched and investors sitting on sizable gains. The oil shock has compounded the pressure, highlighting Asia’s vulnerability to energy disruptions, particularly in the Middle East.

A significant share of the region’s crude and liquefied natural gas imports passes through the Strait of Hormuz, now at the center of the conflict. China, India and Indonesia rank among the world’s largest oil importers, while South Korea and Taiwan — reliant on gas-fired power and Gulf supply chains — are especially exposed.

“I am raising cash levels because if the Middle East crisis continues for a long time, the probability of economic recession or stagflation will inevitably increase,” said Hironori Akizawa, a fund manager at Tokio Marine Asset Management.

Governments across the region are scrambling to cushion the blow. South Korea and Taiwan are weighing market-stabilization measures to stem equity losses and exploring ways to cap domestic fuel costs as energy prices surge.

In a sign of global inflation concerns, traders have been pulling back on US rate cuts and pushing bets for a deeper easing in monetary policy into next year should a slowdown materialize. Investors have pushed back expectations for the Fed’s next quarter-point rate cut to September. At the end of February, before the war erupted, traders had fully priced in a move by July. Some bond options traders are now betting the Fed may not cut rates at all this year.

Read: Yardeni Raises Odds of US Market Meltdown to 35% on Iran War

The geopolitical shock is also colliding with another growing concern: whether the peak of the artificial-intelligence capital-expenditure cycle is near. Signals from major technology companies on the durability of AI infrastructure spending are facing heightened scrutiny as the macro outlook darkens.

“People are going defensive,” said Jun Bei Liu, co-founder and lead portfolio manager at hedge fund Ten Cap Investment Management. “Markets are now trying to grasp how long this war could last and what it means for global growth if oil remains at these levels.”

--With assistance from Gabrielle Ng, Ruth Carson, Marcus Wong and Momoka Yokoyama.

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