Global stock prices fell yesterday and investors desperate for liquidity bid up the US dollar, as surging oil prices looked likely to stoke inflation around the globe, leading central banks to raise interest rates.
Soaring energy prices triggered a wave of global stock and bond market selling. The Dow Jones Industrial Average fell 0.8 per cent, the S&P 500 dropped 0.5pc, and the Nasdaq Composite slid 0.23pc as of midday.
With hostilities continuing and tankers fearing Iranian drone attacks unable to cross the Strait of Hormuz, investors were bracing for a long stretch of higher energy costs.
Investors awaited Washington’s response, said Helima Croft, head of global commodity strategy at RBC Capital Markets. “With no clear definition of what winning looks like, it is hard to forecast whether this will be a multi-week or multi-month conflict.”
European shares tumbled to their lowest in more than two months, with the pan-European STOXX 600 down 1.76pc in a third session of losses. The benchmark index shed 5.5pc last week, its worst weekly performance in nearly a year.
The oil price spike was sobering for major oil importers in Asian markets, with Japan’s Nikkei closing down 5.2pc after a 5.5pc drop. China, another big oil importer albeit with a huge stockpile of crude, saw its blue-chip index fall roughly 1pc. China said inflation had already picked up in February before the current oil surge, with consumer prices rising 1.3pc on the year, not necessarily a negative development, given the country has long struggled with disinflation.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note that the US equity market may still seem placid but there are “extreme” rotations and stock dispersions beneath the surface.
“Over the past 80 years, war-induced oil shocks have not been kind to equities, as nearly every episode has catalysed a recession and market sell-off,” Shalett wrote.
In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. The move was more subdued in the US, with yields on 10-year treasury notes up 0.6 basis points to 4.132pc, up from a trough of 3.926pc just a week ago.
Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, though disappointing US jobs numbers seemed to argue for stimulus.
Data on US consumer prices is forecast to show the annual rate holding at 2.4pc in February.
The Fed’s preferred measure of core inflation due on Friday is forecast to hold at 3.0pc, well above the central bank’s 2pc target, and analysts see a risk of an even higher number.
For the Bank of England, markets have shifted to pricing just a 40pc chance of one more easing, compared with two cuts or more before the Middle East conflict started.
Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe. The dollar jumped 0.25pc to trade at 158.19 yen, outweighing safe-haven demand and pushing gold down about 1.36pc to $5,099 an ounce. The euro slipped 0.27pc to $1.158 . In cryptocurrencies, bitcoin gained 2.85pc to $69,133.52.
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