A selloff in stocks and government bonds deepened while the dollar strengthened on Tuesday, as widening conflict in the Middle East fuelled a spike in energy prices and raised investor concern about inflation.
US S&P 500 e-mini futures were down 1.4% while Nasdaq e-mini futures fell 1.8%, suggesting the selloff may engulf Wall Street later following a volatile session on Monday that saw the S&P 500 rally from an early slide to close flat and the Nasdaq Composite climb 0.4%.
In Europe the STOXX 600 fell as much as 3.6% in morning trading and was last down 2.8% - on track for its biggest daily decline since April - following a 1.7% drop on Monday.
Meanwhile, government bond markets from the Eurozone to the United States and Britain sold off sharply on concerns that sustained higher inflation would likely force central banks to turn more hawkish.
On Monday, US President Donald Trump sought to justify a broad, open-ended war on Iran, saying the campaign was ahead of expectations.
Front and centre on traders' minds is a dramatic surge in oil and natural gas. "For Western Europe, the most notable development is another surge in natural gas prices... which is bringing back quite a lot of fears of potentially a repeat of what we saw in 2022, when Russia invaded Ukraine," said George Moran, European macro strategist at RBC Capital Markets. "It feels like the market is interpreting this as much more of an inflationary shock than a growth shock. Of course, it could still have a growth impact," he said. In natural gas markets, benchmark European LNG prices leapt by 34%, having jumped 39% on Monday, while US natural gas futures were up nearly 6%.
Qatar halted its production of liquefied natural gas (LNG) on Monday, prompting precautionary shutdowns of oil and gas facilities across the Middle East. Qatari LNG production makes up about 20% of global supply. An official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz was closed to marine traffic and the country would fire on any ship trying to pass. Brent crude futures tacked on another 8.9% to $84.64 on Tuesday, up more than 16% on the week.
Investors are grappling with the uncertainty over how long the conflict might last, with no end to hostilities in sight. The US embassy in Riyadh was hit by two drones resulting in a limited fire and some material damage, the kingdom's defence ministry said in a post on X on Tuesday. "Events like that are adding to fears about a more protracted conflict," wrote Deutsche Bank research analysts in a morning note. They added that there are signs investors are still pricing the conflict as temporary rather than protracted. "In particular, it has mainly been the front end of energy curves that have seen sharp spikes, while longer-dated contracts have moved much less," they wrote.
Fed funds futures are pricing an implied 95.4% probability that the US central bank will hold rates at the end of its two-day meeting on March 18, according to the CME Group's FedWatch tool. The odds of a June hold, previously below 50%, edged up on Monday and are now slightly better than a coin-toss.
The dollar index, which measures the performance of the US currency against six others, held close to a six-week high at 99.168 as investors shunned those currencies they perceive to be most vulnerable to higher energy prices. The yield on the US 10-year Treasury note was up nearly 5 basis points at 4.1%. With the dollar holding strong, gold was down 2.7% at $5,185.80 an ounce. Bitcoin fell 2.2% to $67,871.41.
London's FTSE 100 fell for a second straight session on Tuesday, as investors dialled down hopes for interest-rate cuts after surging energy prices rekindled inflation worries ahead of fresh UK economic and borrowing forecasts.
Shares of economically sensitive banks slumped, with HSBC down 4.7%, Barclays off 4.2% and Lloyd's Banking Group losing 3.4%.
By 1144 GMT, the blue-chip FTSE 100 index dropped 2.7%, its steepest one-day fall in nearly a year. The midcap FTSE 250 index, also down 2.7%, slid to its lowest in six weeks.
The Office for Budget Responsibility is expected to cut its forecast for economic growth this year, while British finance minister Rachel Reeves is likely to stick closely to her promises to fix the public finances in a budget update speech later in the day.
"Set against a backdrop of rapidly rising energy prices, there will undoubtedly be plenty of scrutiny over how higher oil and gas prices could spark a fresh bout of inflation," said Joshua Mahony, chief market analyst at Scope Markets.
British government bond yields leapt for a second day on Tuesday as investors slashed their bets on Bank of England rate cuts amid mounting concerns that the U.S.-Israeli war on Iran could add to inflationary pressures.
Traders are pricing less than a one-in-three chance of a quarter-point BoE rate cut this month, a steep drop from the roughly 80% seen late last week.
Among stock movers, Smith & Nephew gained 3.9% after Barclays raised its price target on the medical products maker.
IAG dropped 6.5%, tracking a wider decline in carriers as fuel prices jumped and Middle East travel disruptions persisted for a fourth day.
Agencies
