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Stocks and bonds tumbled on Tuesday as fears of a prolonged shock to energy prices from the widening war in the Middle East rattled global markets.
The S&P 500 fell 1.7 per cent and the tech-heavy Nasdaq Composite dropped 2 per cent shortly after Wall Street trading began.
In Europe, the benchmark Stoxx Europe 600 was down 3.2 per cent, as bank shares led its steepest daily drop since the aftermath of President Donald Trump’s trade war last April. Germany’s Dax fell 3.9 per cent, adding to a 2.4 per cent drop on Monday.
“It’s panic selling,” said Emmanuel Cau, head of European equities strategy at Barclays. “This is a stagflationary scare. The market was complacent about the scale of this war [before the weekend].”
Oil prices also extended their gains on Tuesday, with Brent crude, the international benchmark, rising as much as 9 per cent to above $85 a barrel, the highest level since July 2024. European gas prices surged 24 per cent, while Asian gas prices jumped 65 per cent.
The moves come as the conflict in the Middle East enters its fourth day, with the supply of oil and gas from the region severely reduced as most ships avoid the Strait of Hormuz, a key waterway at the entrance to the Gulf.
Iran stepped up its strikes on energy infrastructure in the region in retaliation for the US-Israeli strikes that began on Saturday. The US embassy in Saudi Arabia on Tuesday warned of an imminent attack on the city of Dhahran, home to state oil giant Saudi Aramco, and a fire broke out at the Fujairah oil terminal in the United Arab Emirates after it was struck by debris from an intercepted drone attack.
“I don’t think the worst is behind us yet in terms of oil supply concerns,” said Elliot Hentov, head of macro policy research at State Street Investment Management. “The short-term threats [by Iran to oil infrastructure] are credible and it’s enough to throttle shipping.”
The price of gold, which rose on Monday as investors sought shelter from the uncertainty, fell 3.3 per cent alongside the drops in stocks and bonds on Tuesday, with analysts suggesting that traders could be liquidating other positions to cover their losses.
“People are taking risk down,” said Peter Schaffrik, global macro strategist at RBC Capital Markets. “The market seems to be mentally transitioning from a short war to a long war.”
Government bonds sold off on Tuesday, particularly in Europe, as rising energy prices prompted traders to scale back bets on further interest rate cuts.
Traders have started to price in a 40 per cent chance of a rate rise by the European Central Bank before the end of the year, according to levels implied by swaps markets. Before the conflict, traders were hoping for further cuts rather than increases.
The move has pushed the two-year German yield 0.11 percentage points higher to 2.2 per cent, adding to a 0.08 percentage point rise on Monday. Bond yields move inversely to prices.
The bond market is being punished for its “complacency” on inflation and hopes for further rate cuts, said Andrew Jackson, head of investments at asset manager Vontobel.
“Inflation is not dead, we haven’t killed that animal,” he said, adding that surging oil and gas prices “are going to make it worse”.
In the UK, the chance of a quarter-point cut at the Bank of England’s meeting later this month has fallen to about 20 per cent, from 90 per cent on Friday. The market is now only fully pricing one such cut by the end of the year.
The yield on the two-year gilt climbed 0.15 percentage points to 3.8 per cent, adding to a 0.12 percentage point rise on Monday.
Matthew Amis, investment director at Aberdeen Investments, said his firm had reduced its exposure to short-dated gilts, because the UK is “vulnerable in this energy shock scenario”.
Jim Reid, at Deutsche Bank, said “the conflict has shown no sign of easing thus far” and that events such as the drone attack on the US embassy in Riyadh were “adding to fears about a more protracted conflict”.
Economists from the bank wrote on Tuesday that “should energy prices stick at current levels, we would expect [BoE] rate cuts to slow”.
US Treasuries also sold off, with the two-year yield 0.08 percentage points higher at 3.56 per cent.
European natural gas prices soared as the market continued to reel from Qatar’s decision to stop production after Iran targeted energy infrastructure in the Gulf state.
Europe’s TTF gas benchmark surged to nearly €60 per MWh, extending Monday’s gains which came as QatarEnergy, the world’s largest liquefied natural gas company, halted its operations.
Prices have now almost doubled this week, as has the UK wholesale natural gas benchmark.
Qatar produces a fifth of the world’s LNG production and is the biggest supplier to Asia, triggering a renewed round of competition with Europe for scarce cargoes of the fuel.
