Asian markets sold off sharply on Wednesday as rising tensions between the UAE and Iran, along with a fresh diplomatic dispute involving France, added to an already elevated risk backdrop across the region. The decline followed losses on Wall Street.

The UAE has formally halted all trade, commercial and financial transactions with Iran, according to Ministry of Foreign Affairs Director of Strategic Communications Afra Al Hameli. The move follows the UAE's earlier allegation that Iran launched missiles against the country, an accusation Iran's foreign ministry has firmly rejected, calling the claims unfounded and pointing to what it described as false flag operations attributed to the US and Israel. Analysts have separately said the trade suspension would be a significant blow to Iran, given Dubai's role in Iranian import markets and its function as a financial channel.

France added another layer to the diplomatic strain, announcing that it will expel two Iranian diplomats in the coming days after two French embassy staff in Tehran were detained and allegedly intimidated in July.

Against that backdrop, oil extended gains into a fourth consecutive session in Asian trade, continuing a rally driven by uncertainty over the operational status of the Strait of Hormuz, the chokepoint through which roughly a fifth of globally traded oil passes.

Equity markets bore the brunt of the risk-off move. South Korea's KOSPI index opened down 5%, with the decline widening to 6% within minutes and triggering the exchange's sidecar mechanism, which suspended program-driven selling for five minutes. Samsung Electronics and SK Hynix, the index's two largest weights, each fell about 7%. Japan's Nikkei 225 dropped more than 3%, with Tokyo Electron down 4% and Kioxia down 9%. Chinese equities also opened lower.

On monetary policy, Reserve Bank of Australia Deputy Governor Andrew Hauser reiterated that inflation remains too high and that monetary policy needs to continue reducing demand in the economy. He said further rate hikes remain possible if inflation fails to ease, while noting that the board is not forecasting a recession, only a slowdown, and that upside inflation risks remain a concern.

On data, Japan's core machinery orders, which exclude volatile items such as ships and electric utilities, rose 9.7% month on month in June, reversing a 12.4% decline the previous month and beating forecasts for a 7.8% increase. It was the third increase this year and the fastest pace since February, pointing to a broad-based recovery in business investment. On an annual basis, orders rose 16.9%, swinging from a 1.9% fall in May and topping estimates for a 10.8% gain, the fastest annual increase in four months.

In Australia, wages grew 0.8% in the June quarter, matching expectations, while the annual pace held at 3.2%, a series the Reserve Bank watches closely as an input to its assessment of domestic inflation pressures.

Elsewhere, the Trump administration agreed to delay planned 50% tariffs on Canadian goods by three days after talks in Washington. Canadian Prime Minister Mark Carney said in a brief statement that substantial progress had been made, though important work remains. The Canadian dollar gained a few points on the news.

Separately, Beijing is allowing small shipments of Nvidia's H200 chips, among the most powerful AI accelerators the company sells, to reach leading Chinese technology firms, with ByteDance and Tencent, two of China's largest technology groups, each receiving around 10,000 processors in recent weeks, according to the Financial Times, as China eases restrictions to help its companies compete in the AI race.

On the security front, scheduled joint US and South Korean military drills are expected to be cut by roughly half, South Korean media reported Wednesday, following an order from President Trump to substantially reduce US participation in the annual exercises.

Other developments in the region included the following: RBA Deputy Governor Hauser said inflation is too high and monetary policy needs to bring it down; the PBOC set today's USD/CNY midpoint at 6.7854 versus an estimate of 6.7421; New Zealand's Q2 2026 producer price index rose; Iraq backed new oil export routes to bypass the Hormuz Gulf bottleneck; and Mizuho said the BOJ may need to hike rates faster as a weak yen fuels inflation risk.