HONG KONG - Asian stock markets tumbled while safe haven assets and oil prices jumped Monday in the first full day's trade of 2016 as a flare-up in tensions between Iran and Saudi Arabia raised concerns about the volatile Middle East.
Saudi Arabia severed diplomatic ties with its old foe Iran Sunday after protesters ransacked its embassy in Tehran in response to the execution of a Shiite cleric.
Riyadh gave Iranian diplomats two days to leave the kingdom, while the supreme leader in Tehran said Saudi Arabia would face "quick consequences" for the execution.
Relations between Sunni-ruled Saudi Arabia and Shiite-ruled Iran have been strained for decades, with Riyadh frequently accusing Tehran of interfering in Arab affairs.
The two countries have also been divided over the nearly five-year war in Syria, where Iran is backing the regime, and the conflict in Yemen where a Saudi-led coalition is battling Shiite rebels.
The developments are the latest to inflame the powder keg region and add to a list of negative news that hurt world markets over the past year, including China's economic malaise, plunging oil prices and anaemic global growth.
"It's going to be a testy start to the week," said Angus Nicholson, a Melbourne-based market strategist at IG Ltd.
"The execution raises uncertainty about the oil price with concerns and tensions in the Middle East and that will be a real driving force." With Saudi Arabia and Iran two of the biggest producers of oil, the price of the commodity rallied in early trade Monday, having suffered a severe slump in 2015 on the back of weak demand and a global glut.
US benchmark West Texas Intermediate climbed 1.7 per cent and Brent surged 1.9 per cent.
Investors fled to safe investments such as the dollar and yen, sending stocks and emerging market currencies tumbling.
Tokyo's Nikkei index lost 2.6 per cent by lunch and Hong Kong was off more than two per cent while Seoul shed 1.5 per cent.
Shanghai tumbled more than three per cent after a closely watched gauge showed factory activity in China continued to shrink in December, despite a marginal improvement.
On forex markets the dollar surged one per cent against its Australian counterpart, while it was up 0.9 per cent against the South Korean won and 0.7 per cent against the Malaysian ringgit.
It also saw sharp gains against the Taiwan and New Zealand dollars as well as Indonesia's rupiah and the Thai baht.
However, the greenback fell below 120 yen, with the Japanese unit considered a safe haven investment in times of turmoil and uncertainty.
"The Saudi situation is, geopolitically, not good news," Kengo Suzuki, chief currency strategist at Mizuho Securities in Tokyo, told Bloomberg News.