SYDNEY — The S&P/ASX 200 index has suffered a punishing sell-off since the US-Iran war erupted on Feb. 28, with more than $300 billion erased from the value of Australian equities as markets increasingly brace for a prolonged conflict that threatens global oil supplies and stokes domestic inflation fears.

The Australian and Aboriginal flags flew on Sydney Harbour Bridge
AFP / Wendell TEODORO

The benchmark fell as low as 8,262 points in intraday trading on March 23 before closing at 8,365.90, down 0.74 percent on the day and marking its lowest level since May 2025. From its recent peak near 9,203 points in early March, the index has dropped more than 9 percent — entering correction territory and wiping out roughly $300 billion to $320 billion in market capitalization across the broader All Ordinaries.

The bloodbath reflects deep anxiety over disruptions to the Strait of Hormuz, through which roughly one-fifth of global oil passes. Oil prices have surged more than 50 percent since late February, with Brent crude hovering above $100 per barrel and briefly testing $110-$120 in volatile sessions. Higher energy costs are feeding directly into Australian inflation forecasts, prompting the Reserve Bank of Australia to signal that every upcoming policy meeting is now "live" for potential rate hikes.

Energy Minister Chris Bowen and Treasury officials have warned that sustained high oil prices could shave up to 0.6 percent from GDP growth by 2027 in a worst-case scenario, while pushing headline inflation 0.75 to 1.25 percentage points higher. Australia imports about 90 percent of its refined fuel despite exporting crude and LNG, leaving households and businesses exposed to pump prices that have climbed 20-70 cents per litre in many regions.

Mining and energy stocks, which typically benefit from higher commodity prices, offered only limited support. Iron ore and other metals came under pressure amid fears of slower global growth, while gold — often a safe-haven asset — tumbled on expectations that central banks might keep rates elevated longer. Banks and consumer discretionary names bore the brunt of the selling as higher borrowing costs and squeezed household spending weighed on sentiment.

Analysts describe the sell-off as the worst fortnight for Australian equities in four years. The index has now lost more than 7 percent over the past month and sits about 2 percent lower year-to-date despite earlier gains in 2026. Trading volume spiked during the heaviest decline days, signaling broad-based capitulation rather than isolated sector moves.

President Donald Trump's mixed signals — including an ultimatum to Iran over the Strait of Hormuz followed by reports of postponed additional strikes and tentative outreach — have added to volatility. Brief relief rallies on de-escalation hopes quickly faded when Tehran denied talks or issued fresh threats against Gulf infrastructure. Markets appear to be pricing in a "long war" scenario rather than a swift resolution.

The Australian dollar weakened against the greenback amid risk-off flows, further complicating the outlook for importers and exporters. Higher fuel and transport costs are already rippling through supply chains, with farmers, airlines and logistics firms flagging margin pressure and potential fare increases.

Despite the turmoil, some sectors have shown resilience. Certain defence and cybersecurity names posted modest gains on expectations of increased government spending, while a handful of LNG exporters benefited from elevated global energy prices. Overall, however, the negative sentiment has dominated.

Economists at major banks have revised forecasts downward. Westpac and Commonwealth Bank modelling suggest retail petrol could average around A$2.00-A$2.50 per litre if oil remains elevated, with underlying inflation staying sticky above the RBA's 2-3 percent target band well into 2027. The central bank's recent rate hike has compounded the pain for interest-rate-sensitive sectors such as property and retail.

Retail investors have reacted with a mix of caution and opportunism. Some have rotated into cash or defensive assets, while others have scooped up beaten-down quality names on the view that any de-escalation could spark a sharp rebound. Exchange-traded funds tracking the ASX 200 saw heavy outflows during the steepest drops.

The quarterly rebalance of the S&P/ASX 200, which took effect in March, offered little buffer. Additions and deletions reflected the current market environment but could not shield the index from geopolitical shockwaves.

Looking ahead, attention turns to any diplomatic breakthroughs or further military developments in the Middle East. International Energy Agency-coordinated stockpile releases and diplomatic efforts involving multiple nations aim to stabilize flows, but analysts warn that a prolonged Hormuz disruption could push prices toward $150 in extreme scenarios.

For Australian policymakers, the challenge is multifaceted. Treasurer Jim Chalmers has described the economic consequences as "very substantial," noting they will shape the upcoming May budget. Calls have grown for targeted relief measures or a windfall tax on resource profits to help ease cost-of-living pressures on households.

The ASX 200's decline mirrors broader global weakness, with European and Asian markets also under pressure. Yet Australia's heavy weighting toward resources and its status as a net energy exporter create a unique mix of headwinds and partial offsets that has still resulted in net losses.

As trading continues amid heightened uncertainty, market participants remain on edge. Technical analysts note the index has tested key support levels multiple times, with any break lower potentially accelerating the sell-off. Conversely, credible signs of de-escalation could trigger a relief rally of 5-10 percent or more.

For now, the narrative is one of caution. Investors are pricing in a longer and more disruptive conflict than initially hoped, with implications for inflation, growth and monetary policy that extend well beyond the immediate headlines from the Middle East.

The $300 billion-plus evaporation of wealth on the ASX serves as a stark reminder of how interconnected global markets have become — and how quickly geopolitical shocks can translate into domestic financial pain. Whether the bloodbath marks the bottom or merely a pause in a deeper downturn will depend on developments far from Australian shores.