Asian equity markets closed sharply lower on Thursday after Iran’s foreign minister ruled out direct negotiations with the United States, dashing hopes for imminent de-escalation in the Middle East and triggering broad risk-off sentiment across the region.
South Korea’s KOSPI led regional losses, plunging more than 3 percent to 5,460.46, while the small-cap KOSDAQ shed 1.98 percent to 1,136.64. Hong Kong’s Hang Seng Index slid 1.9 percent, and mainland China’s CSI 300 fell over 1 percent to 4,477.53. Japan’s Nikkei 225 declined 0.27 percent to 53,603.65, with the broader Topix down 0.22 percent to 3,642.8.
The selloff came after Iranian Foreign Minister Abbas Araghchi stated that Tehran had no intention of holding direct talks with Washington, even as the Islamic Republic reviews an American proposal to end the ongoing regional conflict. Araghchi clarified that exchanges of messages between the two countries through mediators “does not mean negotiations with the U.S.” The comments undercut market expectations that back-channel diplomacy might lead to formal negotiations, raising the tail risk of prolonged or escalating tensions in the Middle East.
The geopolitical news hit Korean equities particularly hard, extending a period of heightened volatility that has seen the KOSPI experience double-digit intraday swings in recent weeks. The index had surged to above 6,300 points in late February 2026, propelling South Korea to become the seventh largest equity market globally with a market capitalisation of approximately 3.9 trillion dollars. That rally was driven by euphoria around artificial intelligence and semiconductor demand, with heavyweights Samsung Electronics and SK Hynix leading the charge.
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However, the sharp reversal on Thursday suggests that positioning in Korean equities had become crowded and vulnerable to external shocks. The KOSPI’s status as a high-beta, liquid proxy for the global AI and semiconductor cycle means it tends to amplify both gains and losses during periods of shifting risk appetite.
The geopolitical tensions carry particular significance for Asian markets given their exposure to energy price volatility and global supply chain disruptions.
Japan and South Korea are both large net energy importers, making them vulnerable to any prolonged conflict that keeps crude oil and shipping risk premiums elevated. Higher energy costs would pressure corporate margins and real incomes, potentially derailing the earnings upgrade cycles that have underpinned recent equity rallies in both markets.
For Japan, the modest decline in the Nikkei 225 and Topix masks a subtle shift in sentiment. The indices had recently traded near record highs, supported by foreign inflows attracted to corporate governance reforms and automation themes.
Hong Kong’s decline reflects its dual exposure to both regional risk-off flows and China-specific headwinds. The Hang Seng Index is heavily weighted toward financials, technology, and cyclicals, making it a preferred vehicle for global investors to express views on Chinese growth. The combination of Middle East tensions and ongoing concerns about domestic property sector stress and uneven economic momentum in China led to disproportionate selling pressure in the offshore market.
Despite the declines today, some argue that the underlying structural cases for Asian equities remain intact. JP Morgan has set a base-case target of 6,000 for the KOSPI in 2026, with some analysts discussing bull scenarios as high as 7,500 to 8,000, anchored in forecasts for very strong earnings growth from semiconductors and cyclicals. Recent rebounds after prior selloffs demonstrate that dip-buying appetite exists among both domestic and foreign investors when macro headlines stabilise.
The key question for markets is whether the Iran-U.S. tensions represent a shorter lived shock or signal a more prolonged period of elevated geopolitical risk. Energy markets will be closely watched for signs of supply disruption or sustained price increases, whilst any material escalation that disrupts global trade flows or pushes inflation expectations higher could force central banks to maintain tighter policy for longer, weighing on equity valuations that have already run ahead of fundamentals in some segments.
