Oil prices surged, the dollar jumped and shares slid yesterday as military conflict in the Middle East looked set to last for weeks, threatening to upend a global economic recovery and perhaps reignite inflation.
Brent jumped around 10 percent to $79.90 a barrel, though it had briefly topped $82 at one stage, while the US crude climbed 8.2 percent to $72.64 per barrel. Safe-haven gold rose 2.6 percent to $5,413 an ounce.
Israel launched new air strikes targeting Tehran and expanded its military campaign to include attacks on Iran-backed Hezbollah militants in Lebanon on Monday, as US President Donald Trump signalled the US-Israeli military assault on Iranian targets could continue for weeks.
Meanwhile, Iran’s state media said a new wave of missiles was being launched from central parts of Iran towards “enemy locations”.
All eyes were on the Strait of Hormuz, through which around a fifth of the world’s seaborne oil trade flows and 20 percent of its liquefied natural gas.
While the vital waterway has not yet been blocked, marine tracking sites showed tankers piling up on either side of the strait, wary of attack or maybe unable to get insurance for the voyage.
“At least in the short term, the disruption to global energy supply is substantial, (and) this clearly adds upside risks to the oil price,” said Michael Langham, emerging markets economist at Aberdeen Investments.
However, “a global oil price shock is not the intention of the Trump administration ahead of US mid-term elections in November”, he added.
A prolonged spike in oil prices would risk reigniting inflationary pressures globally, while also acting as a tax on business and consumers that could dampen demand.
Opec+ did agree to a modest oil output boost of 206,000 barrels per day for April on Sunday, but a lot of that product still has to get out of the Middle East by tanker.
Meanwhile, stock markets around the world tumbled. Europe’s broad STOXX 600 slid 1.7 percent, after Asia Pacific ex Japan shares had fallen 1.8 percent US S&P 500 futures were down 1.5 percent.
Energy stocks were big gainers, however, up 4 percent in Europe to a new record high with energy giants BP and Shell each nearly 6 percent higher, while European defence stocks also gained 1.3 percent.
The energy moves were also relevant for currency markets given the US is a net energy exporter while both Europe and Japan rely heavily on imports.
Brent briefly spiked almost 14 percent and West Texas Intermediate nearly 12 percent at the start of business.
In the Middle East, the UAE and Kuwait temporarily closed their stock markets citing “exceptional circumstances”.
And Chinese blue-chips were a rare gainer, up 0.4 percent though the country does get much of its seaborne oil imports from the Middle East.
In currency markets, the euro and pound were each down around 1 percent at $1.1704 and $1.3347 respectively.
The dollar was by far the biggest gainer, rallying even on safe havens such as the Swiss franc and Japanese yen. It climbed 0.6 percent on the Japanese yen and 0.5 percent on the Swiss franc to 157 yen and 0.7733 francs.
“The dollar’s correlation to risk is back,” said Jordan Rochester, head of fixed income and currency strategy EMEA at Mizuho.
The dollar’s traditional role as a global safe-haven currency had been challenged by erratic US policymaking.
Airline stocks took a battering as they were forced to cancel flights to the region. Cathay Pacific sank four percent in Hong Kong, Sydney-listed Qantas dived 5.4 percent and Singapore Airlines was off 4.8 percent. Japan’s ANA and JAL fell more than five percent.
Gold -- a key go-to in times of turmoil -- climbed two percent, while the dollar also saw a boost from a rush into safe havens.
