San Francisco Frontiers - Energy prices jump, stocks slump on Iran war

World oil prices soared around eight percent and European natural gas prices rocketed for a second day running as the war disrupted Middle East exports.

Brent North Sea crude, the international benchmark, topped $85 a barrel for the first time since July 2024.

The US and Israeli attacks on Iran and its retaliation across the region have upended regional energy flows, with the crucial Strait of Hormuz -- through which about a fifth of global oil transits -- effectively closed off.

The war has stoked fears of a fresh energy crisis that could ramp up inflation.

"The higher energy costs are fueling inflation concerns, pushing out rate cut expectations for some and increasing rate hike possibilities for others, while also raising earnings concerns that stem from higher operating costs and a potential slowdown in consumer spending," said Briefing.com analyst Patrick O'Hare.

Wall Street's main indices were down more than one percent in midday trading.

European markets were hit even harder. London fell 2.8 percent but both Frankfurt and Paris dropped by more than three percent.

"European markets are being hit hard as the full inflationary impact of the war in Iran truly comes home to roost," said Joshua Mahony, chief market analyst at Scope Markets.

Data showed an unexpected rise in eurozone core inflation, adding to concerns.

Forex.com analyst Fawad Razaqzada said that the inflation concerns have diminished chances of an interest rate cut in the eurozone.

"That's why we have seen a huge drop in stock markets today with even gold also unable to find much love," he said.

The European Central Bank's chief economist Philip Lane said in an interview with the Financial Times published Tuesday that a lengthy Middle East conflict could trigger a "spike" in eurozone inflation and hit regional growth.

- Threat to energy supplies -

New strikes were reported Tuesday across the Middle East, including Israeli bombardment on Lebanon and a drone attack on the US embassy in Saudi Arabia's capital Riyadh.

The conflict started with US and Israeli strikes on Iran over the weekend, which sparked retaliatory Iranian attacks and showed no sign of abating as it entered its fourth day.

Iran has unleashed missiles and drones across the Middle East, including at Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.

A general in Iran's Revolutionary Guards threatened to "burn any ship" seeking to navigate the Strait of Hormuz, while another general vowed to strike "all economic centres" in the Mideast if the US-Israeli attacks continue.

Iraq has reduced production at a major oil field due to a shortage of tankers.

The Dutch TTF natural gas contract, considered the European benchmark, shot up more than 40 percent to over 60 euros Tuesday -- its highest level since January 2023, in the wake of the price spike triggered by the Ukraine war.

European natural gas prices had surged 50 percent on Monday after Qatar's state-run energy firm said it had halted liquefied natural gas production due to strikes.

The rise in energy costs could give most central bankers a headache as they look to bring down inflation while also cutting interest rates to support their economies.

Capital Economics economists Jennifer McKeown and William Jackson said the US Federal Reserve, ECB and Asian central banks would likely delay interest rate cuts.

But the Bank of England and central banks in parts of Latin America and Central Europe could be forced to hike rates.

The dollar, seen as a safer bet in times of economic unrest, extended gains against major rivals.

Asian equities extended Monday's losses.

- Key figures at around 1630 GMT -

West Texas Intermediate: UP 8.1 percent at $77.00 per barrel

Brent North Sea Crude: UP 7.8 percent at $83.79 per barrel

New York - Dow: DOWN 1.8 percent at 48,045.17 points

New York - S&P 500: DOWN 1.6 percent at 6,769.40

New York - Nasdaq Composite: DOWN 1.7 percent at 22,359.17

London - FTSE 100: DOWN 2.8 percent at 10,484.13 (close)

Paris - CAC 40: DOWN 3.5 percent at 8,103.84 (close)

Frankfurt - DAX: DOWN 3.4 percent at 23,790.65 (close)

Tokyo - Nikkei 225: DOWN 3.1 percent at 56,279.05 (close)

Hong Kong - Hang Seng Index: DOWN 1.1 percent at 25,768.08 (close)

Shanghai - Composite: DOWN 1.4 percent at 4,122.68 (close)

Euro/dollar: DOWN at $1.1590 from $1.1688 on Monday

Pound/dollar: DOWN at $1.3312 from $1.3399

Dollar/yen: UP at 157.80 yen from 157.31 yen

Euro/pound: DOWN at 87.08 pence from 87.23 pence

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M.Powell--SFF