On Tuesday, energy markets took an alarming turn, sending stocks plummeting and the dollar surging amid concerns over inflation and the central banks’ inability to address the crisis through interest rate cuts. The surge in oil prices hit 9% higher and European natural gas prices rocketed for a second day, with supply disruptions exacerbated by the ongoing war in the Middle East.
The Brent North Sea crude benchmark broke above $85 per barrel for the first time since July 2024. Concerns over regional energy flows were heightened as the strategic Strait of Hormuz remained closed, affecting approximately one-fifth of global oil transit.
War-related disruptions have stoked fears of a renewed energy crisis that could exacerbate inflation further. Analyst Patrick O’Hare from Briefing.com noted: “Higher energy costs are driving up inflation concerns and pushing back interest rate cut expectations for some while increasing the likelihood of more rate hikes for others.”
Wall Street’s main indices started in negative territory, with tech-heavy Nasdaq Composite closing down by nearly 2%. European markets were hit even harder with losses exceeding three percent. Scope Markets’ Joshua Mahony highlighted: “European markets are being dealt a blow as inflation impacts from the Iran war really settle into place.”
Data released on Tuesday indicated an unexpected rise in eurozone core inflation, adding to existing concerns.
Forex.com analyst Fawad Razaqzada explained: “These worries about energy have diminished the prospect of interest rate cuts in the eurozone.” The drop in stock markets mirrored a significant decline in gold prices as well.
European Central Bank’s chief economist Philip Lane observed in an interview with the Financial Times: “A prolonged conflict and sharp decrease in energy supplies could trigger a ‘spike’ in inflation for the eurozone, impacting regional economic growth.”
More recent developments included new strikes across the Middle East—Israeli bombardment of Lebanon and a drone attack on the US embassy in Riyadh. These attacks signaled an escalation of the conflict, with Iranian retaliations continuing over the past four days.
The Dutch TTF natural gas contract spiked by more than 40 percent to above €60 per unit on Tuesday—a level last seen in January 2023—triggered by Qatar’s state-run energy firm’s decision to halt liquefied natural gas production due to ongoing strikes.
These surging energy costs have left most central bankers grappling with a dilemma: How can they bring down inflation without exacerbating an already challenging economic situation characterized by stagflation.
The dollar, typically seen as a safe haven in times of market unrest, continued its upward trajectory against major currencies.
Asian markets also saw sharp declines on Tuesday. Seoul experienced its worst day since the stock market’s inception with losses exceeding seven percent, while Tokyo dropped nearly three percent. Notably, Japanese cities such as Hong Kong, Shanghai, Sydney, Wellington, Taipei, and Jakarta were all seeing significant declines in their own stock markets.
The turmoil underscored the interconnectedness of global energy markets and the profound impact that regional conflicts can have on international financial stability.