Key Takeaways
- Global stocks extended declines for a second day as the escalating Iran war threatened a prolonged uplift to energy prices.
- LNG and crude oil prices have continued to rally as shipments through the Strait of Hormuz remain choked off.
- Analysts warn of a possible inflationary shock if the conflict draws out, which would widen the market segments affected by the turmoil.
European stocks declined sharply for a second day, as the region’s vulnerability to sharply rising energy prices became apparent.
“The market has effectively priced in a wider scale conflict, but with further escalation or a prolonged conflict, expect markets to fall further,” Morningstar chief European markets strategist Michael Field says. “Markets certainly won’t be rallying while this conflict is ongoing.”
The Morningstar Europe Index fell 3.1% on Tuesday, deepening its slump this week to 4.8%, on track for its worst weekly loss since the week ended April 4, when a slew of US tariff measures drove an 8% selloff in European stocks.
The Morningstar US Market Index fell as much as 2.4% after the open on Tuesday, after rebounding from a similar slump at the previous session’s open. The VIX volatility index, meanwhile, spiked to a 10-month high as rising geopolitical tensions rattled investor sentiment.
Natural Gas Prices Skyrocket
TTF, the European gas benchmark, continued its rapid price increase a day after Qatar shut off production at its Ras Laffan facility amid Iranian attacks. Ras Laffan is the source of about a fifth of global liquefied natural gas supplies.
“EU storage is low, as cold weather depleted stockpiles, with an expectation of plenty of supply in 2026 as new American and Qatari production comes online,” Morningstar analyst Adam Baker says. “The EU will be competing with Asian buyers who consume Qatar’s volumes.”
China and India, the largest buyers of Qatari LNG, could indeed “bid up” to secure necessary volumes, further exacerbating prices, Andreas Schroeder, head of energy analytics at commodity research group ICIS, says. Having almost doubled since the end of last week, Schroeder says prices could potentially skyrocket to EUR 90 if the conflict were to run on for several months, rather than the currently more likely scenario of days or weeks.
Meanwhile, Brent crude oil also continued its climb above the USD 80 threshold.
“Oil supply disruption should continue into next quarter and European gas prices will be pushed up due to the need to replenish storage,” says Riccardo Marcelli Fabiani, senior economist at Oxford Economics.
Capital Economics notes that oil prices could be expected to remain in the USD 80 range for a prolonged period if the war continues, without significantly reducing supplies. If, however, further targeting of energy infrastructure across the region results in a substantial hit to flows, prices could rise to USD 90 to USD 100.
The euro, meanwhile, continued to weaken against the dollar, falling to USD 1.16 from USD 1.18 on Friday. The spot gold price pared its gains from the first days of the war.
Volatility indices have spike over recent days, as investors weigh the potential severity and duration of the conflict, and its ramifications for global inflation as oil prices remain elevated.
Will the Iran War Bring Back High Inflation?
“Oil prices and inflation are directly linked,” Joanna Stocks, Senior Investment Manager at Mattioli Woods, says. “Any prolonged disruption has a risk of pushing oil towards $100 a barrel which, if it persisted for a longer time frame would have a meaningful impact on global inflation. Economists estimate this could push consumer prices above 4% in some major economies.”
Such an inflationary scare could ripple across economies, eroding consumer purchasing power and dampening investor sentiment
Stefan Eppenbereger, Vontobel
“Such an inflationary scare could ripple across economies, eroding consumer purchasing power and dampening investor sentiment,” Stefan Eppenbereger, chief investment strategist at Vontobel, adds.
Inflation across the euro area picked up even before the war’s onset, with preliminary data for February showing an unexpected acceleration to 1.9% in February, up from 1.7% in January. Economists had expected the figure to remain at January’s level.
A spike in inflation could, in turn, compel central banks to slow their rate cutting cycles, or indeed raise rates, further hitting equity and bond markets. Already, traders have trimmed odds of near-term rate cuts from several key central banks since the war broke out.
Charu Chanana, chief investment strategist at Saxo Bank, says that could ultimately see equity market losses shift from fuel-sensitive categories, such as travel and leisure stocks, to broader sectors like consumer discretionary, mega-cap tech, software and growth stocks.
“Iran escalation is not one market story. It sends shifting signals to investors. It typically hits portfolios through three shocks: oil, inflation/rates, and risk-off/liquidity,” she says.
Sara Silano, Sunniva Kolostyak and Francesco Lavecchia contributed to this story.
