Middle East tension keeps investors, markets on edge

TOKYO

Oil prices rallied and equities sank on April 19 as reports said explosions had been heard in Iran and Syria, fuelling fears of an escalation of the Middle East crisis after last weekend's missile attack on Israel by Tehran.

Traders have been on edge since last week’s barrage by Iran, which Israel's army chief General Herzi Halevi warned would be met with a response.

Iran state TV said three blasts had been heard near central Isfahan.

The news sent shivers through markets, with both main oil contracts surging more than three percent on worries about supplies from the crude-rich region, while fears of a regional conflict saw equities tumble.

The rush for safety also saw the yen rally against the dollar and gold jump more than one percent past $2,400.

"It is now clear that the escalating shadow warfare between Israel and Iran... has finally ignited the powder keg in the Middle East, and we have moved decisively out of the shadows and into the glaring light of open conflict," said Stephen Innes of SPI Asset Management.

"It should be noted that this is not a staged response to an Iranian drone attack but rather an indication that we have entered a new phase of this conflict, one that is likely to have significant and far-reaching consequences for Middle East peace and least of all risk markets."

The mood among traders was already downbeat as they contemplated the prospect of the Fed staying pat on interest rates this year following data showing jobless claims came in below expectations while a gauge of business activity hit a two-year high.