STOCKS AND BONDS TUMBLE AS WIDENING MIDDLE EAST WAR RATTLE MARKETS / THE FINANCIAL TIMES

Stocks and bonds tumble as widening Middle East war rattles markets

Oil surges above $85 a barrel and European natural gas prices almost double this week as conflict escalates across region

Emily Herbert, Verity Ratcliffe and Ian Smith in London

Qatar produces a fifth of the world’s LNG production © Reuters

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.

In Europe, the benchmark Stoxx Europe 600 was down 2.8 per cent, as banks led its steepest daily drop since the aftermath of President Donald Trump’s trade war last April. 

Germany’s Dax fell 3.3 per cent, adding to a 2.4 per cent drop on Monday.

Futures tracking the S&P 500 and Nasdaq 100 indicated that the Wall Street benchmarks would drop 1.4 per cent and 1.7 per cent respectively.

“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 36 per cent.

The price of gold, which rose on Monday as investors sought shelter from the uncertainty, fell 2.4 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.”

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 has also launched extensive strikes on energy infrastructure in the region in retaliation for the US-Israeli strikes that began on Saturday. 

On Monday, the Qatari defence ministry said Iran targeted Qatar’s LNG facility in Ras Laffan.

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 30 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 0.08 percentage points higher to 2.17 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 30 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 0.17 percentage points to 3.81 per cent, adding to a 0.12 percentage point rise on Monday.

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 0.07 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 more than €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.