The anticipated conflict has materialized. As discussed last Friday, a US strike on Iran appeared imminent. Military action commenced the following day, triggering turbulence across global equity markets. Hong Kong's market fell sharply today, dropping 2.14%. US stocks are also expected to face significant pressure tonight. In contrast, mainland Chinese shares demonstrated relative resilience, partly attributed to gains in the major oil companies, and overall market panic was less pronounced than in previous crises.
The operation was a coordinated effort by the United States and Israel. The US used negotiations as a pretext to create a false sense of security, while simultaneously preparing for the strike. The decision to act during daylight hours on February 28th was based on intelligence indicating Iran's Supreme Leader would be convening a meeting of core members, enabling a successful targeted strike. The nature of this action was exceptionally severe and rare. Iran's retaliation was swift and forceful, primarily targeting Israel, followed by successive, deep strikes on US military bases across the Middle East, differing significantly from previous, more symbolic exchanges.
More critically, according to Iranian reports from March 2nd, the US consulate in Erbil, Iraq, has been rendered "destroyed and unusable." Attacks on diplomatic missions are highly unusual, underscoring Iran's firm resolve. It remains unclear if support was provided by Turkey or Iraqi militias, suggesting the "Axis of Resistance" may be reactivated. The subsequent actions of Hezbollah and the Houthis are now closely watched.
Tension is high among Middle Eastern nations. Iran's strategy appears to involve striking US bases first, followed by actions targeting oil infrastructure. Saudi Arabia's defense ministry reported intercepting two drones near the Ras Tanura refinery, with falling debris causing a localized fire but no civilian casualties. European nations are particularly concerned. With Russian oil largely inaccessible, Europe relies heavily on Middle Eastern supplies. If other producers, especially Saudi Arabia, are affected, Europe would suffer severely, potentially forcing reliance on expensive US oil. France's foreign minister stated the country is "prepared" to participate in defensive operations with Gulf states. By drawing regional nations into the conflict, Iran employs another method of retaliation.
The market's primary concern is the Strait of Hormuz, a critical artery for global oil shipments and a veritable choke point for the world economy. Reports on February 28th indicated that Iran's Revolutionary Guard announced the closure of the Strait of Hormuz. With traffic for tankers and other vessels halted, the strait is effectively closed. A closure lasting ten days to two weeks would have a massive impact on the global economy; a longer closure would have dire consequences.
Returning to markets, the immediate effect was a sharp spike in international oil prices. Brent crude futures surged by as much as 13% at the open, reaching a high of $82 per barrel. WTI crude futures jumped over 10% to $75 per barrel, marking the largest single-day opening gain in recent memory. Analysis from Goldman Sachs suggests that a full, one-month closure of the Strait of Hormuz, without offsetting measures like using alternative pipelines or releasing strategic reserves, could add $15 to the fair value per barrel of oil.
Among the major Chinese oil companies, CNOOC (00883) saw the largest gain, rising over 5%. PetroChina (00857) and Sinopec (00386) advanced around 3%. Their A-share counterparts, however, surged by the daily limit. Beyond liquidity differences, sentiment and a premium for domestic investors played a role. With the Hong Kong market falling significantly, buying interest was cautious, suggesting foreign investors may hold a more optimistic view regarding the Strait of Hormuz.
The oil price surge boosts revenue and profits for exploration and production companies, likely increasing capital expenditure on expansion and exploration. Both offshore and onshore exploration activity is expected to intensify. Zhitong's March stock pick, Shandong Molong (00568), soared nearly 116%, while Sinopec Oilfield Service (01033) rose over 34%. Rerouting for shipping is inevitable, driving freight rates higher. Leading tanker company COSCO SHIPPING Energy Transportation (01138) gained nearly 9% again. Given its substantial gains, it was not selected as a top pick; instead, COSCO SHIPPING Development (02866) was chosen for its lower position, though its performance today was modest. Orient Overseas (International) (00316) rose over 2%.
Gold, a traditional safe-haven asset, climbed as expected. Chifeng Jifeng Gold (06693) led with a gain exceeding 12%, while Shandong Gold (01787) and Zhitong's March pick Zhaojin Mining (01818) both advanced over 6%. Other metals followed suit; China Hongqiao (01378) rose over 7%, and Zhitong's March pick Aluminum Corporation of China (02600) gained over 3%. Copper also performed strongly.
The conflict's impact is multifaceted. Iran is the world's second-largest methanol producer, accounting for roughly 9% of global capacity and 60% of China's methanol imports. CIMC Enric (03899), which covers the entire green methanol supply chain, saw its shares rise over 6%. A new narrative is emerging for coal. If trade and logistics for chemical products like methanol are disrupted, domestic demand for coal in chemical production could increase, supporting coal prices. This is compounded by export disruptions from reduced Indonesian output, leading to positive expectations for domestic coal prices. Mongol Mining (00975) rose over 7%, while China Coal Energy (01898), Yancoal Australia (03668), and Yankuang Energy Group (01171) all gained over 3%. The power sector also rose, with Huadian Power International (01071) and Huaneng Power International (00902) up over 2%.
Airlines faced negative impact. Multiple Chinese carriers issued travel change and refund policies for Middle East flights. On the evening of February 28th, Air China (00753), China Eastern Airlines (00670), and China Southern Airlines (01055) announced special measures for tickets involving Middle Eastern destinations, allowing fee-free refunds under certain conditions. With Middle Eastern routes largely severed, the impact is significant, leading to declines exceeding 6% across the sector.
On March 2nd, BYD, responding to investor inquiries, announced a disruptive technology launch event scheduled for March 5, 2026, stating it would "once again change the world with technology." Data released on March 1st showed BYD sold 190,190 vehicles in February, maintaining its position as China's top-selling NEV brand. Notably, February exports reached 100,600 units, surpassing domestic sales for the first time. These positive catalysts helped its shares rebound over 4% from recent lows. The market awaits details on the promised disruptive technology.
Regarding the conflict's duration, a statement on March 1st suggested military action against Iran could last "around four weeks, possibly shorter," describing it as the "current government's expected timeline." The statement added, "Iran wants to talk, and I agree to talk, so I will talk with them." However, Iran's Supreme National Security Council secretary stated on March 2nd that there would be no negotiations with the US.
Analysis suggests the initial US-Israel plan anticipated internal collapse following the targeted strike, leading to quick negotiations and a rapid conclusion. This calculation may have misfired. Unlike Venezuela, Iran's leadership, supported by a highly loyal Revolutionary Guard, necessitates a strong retaliatory stance for any successor to maintain authority. Furthermore, stronger retaliation provides Iran with greater negotiating leverage. The stated four-week timeline may be a posture of strength. Overall, the conflict is expected to last at least a fortnight. Beyond that point, it could extend for months, posing a significant test for the global economy. China, with its comprehensive industrial and resource systems, may serve as a relative safe haven. The impact on the A-share market may be limited, though stock performance will vary. The Hong Kong market, with greater foreign participation, is likely to experience more substantial volatility.