NEW YORK/LONDON, March 26 - Global financial markets declined sharply on Thursday as the nearly one-month-old Middle East war showed little sign of abating, sending Brent futures to $108.01 a barrel and amplifying worries about broader economic fallout.
A senior Iranian official described a U.S. proposal to end almost four weeks of fighting as "one-sided and unfair." At the same time, U.S. President Donald Trump said Iran must make a deal or face a continued onslaught. Those competing messages contributed to fading hopes for a swift diplomatic resolution and accelerated risk aversion across asset classes.
Equity indexes extended losses into the afternoon. The Dow Jones Industrial Average fell 433.68 points, or 0.93%, to 45,995.81. The S&P 500 dropped 100.65 points, or 1.53%, to 6,491.25. The Nasdaq Composite declined 457.97 points, or 2.09%, to 21,472.60; the Nasdaq was down more than 10% from its October 29 closing high and was on track to confirm a correction.
"Stocks fell as oil prices resumed their upward climb," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "Unfortunately, we’re in a market that’s being driven by oil prices. The rhetoric back and forth is continuing, and until talks begin, the market is going to be subject to the price of oil."
MSCI’s gauge of stocks across the globe fell 14.89 points, or 1.50%, to 980.57, while the pan-European STOXX 600 index lost 1.13%. In Asia, Japan’s Nikkei closed down 0.3%, South Korea’s KOSPI slumped 3.2% amid concerns about rising energy costs, Hong Kong’s Hang Seng fell 1.9% and China’s blue chips dropped 1.3%.
The war, which was triggered by U.S.-Israeli strikes on Iran, rattled markets in part because it has effectively closed the Strait of Hormuz - a key route that carries about one-fifth of global oil and liquefied natural gas volumes. That prospect of sustained supply disruption pushed oil and European natural gas prices higher.
Global debt markets sold off as yields rose. The yield on benchmark U.S. 10-year Treasury notes climbed 8.2 basis points to 4.41%, from 4.328% late on Wednesday. (Bond yields move inversely to prices.) Germany’s two-year bond yield, which is sensitive to expectations for European Central Bank policy, increased after having fallen on Wednesday.
Worries about persistent inflation and a potential repeat of a 2022-style inflation shock led traders to fully price out any chance of a Federal Reserve rate cut this year, supporting the dollar’s safe-haven appeal. Earlier in the session, the yield on Japan’s two-year government bond reached 1.33%, its highest level in 30 years, as traders cemented bets on another Bank of Japan rate hike as early as next month.
In currency markets, the U.S. dollar strengthened against most major currencies. The dollar index, which tracks the greenback versus a basket of currencies including the yen and the euro, rose 0.3% to 99.92. The euro slipped 0.24% to $1.1529 while the dollar strengthened 0.19% against the Japanese yen to 159.75.
Safe-haven flows to the dollar coincided with a drop in bullion: spot gold fell 2.53% to $4,391.08 an ounce.
The market moves have prompted central banks and policymakers to react or take note. The Philippines convened an unscheduled central bank meeting amid the turmoil. Germany’s central bank head said an ECB rate hike next month was "an option." Those developments underscore how monetary policy deliberations are being shaped by the interaction of geopolitical risk and inflation concerns.
Summary
Escalation in the Middle East has driven oil to above $108 a barrel, knocked global equity benchmarks lower, lifted sovereign yields and strengthened the U.S. dollar, as officials on both sides signalled a lack of immediate progress toward negotiation.
- Key points
- Energy markets tightened as Brent settled at $108.01 a barrel, reflecting heightened risk to oil and LNG supply routes.
- Major equity indices fell across the U.S., Europe and Asia, with the Nasdaq approaching correction territory.
- Bond yields rose globally and the dollar gained on safe-haven flows, while spot gold moved lower.
- Risks and uncertainties
- Prolonged conflict could further disrupt energy shipments through the Strait of Hormuz, impacting energy prices and trade flows - primarily affecting the energy sector and energy-importing economies.
- Rising energy costs increase inflationary pressures, which could influence central bank policy decisions and bond markets, especially in Europe, the U.S. and Japan.
- Heightened market volatility may prompt emergency policy responses, such as unscheduled central bank meetings, and could exacerbate equity and currency swings across global markets.