Volkswacht Bodensee - Global markets turmoil intensifies on Iran war

World oil prices soared more than eight percent and European natural gas prices rocketed for a second day running as the war disrupted Middle East exports.

Brent North Sea crude, the international benchmark, topped $85 a barrel for the first time since July 2024.

The US and Israeli attacks on the Islamic republic and its retaliation across the region have upended regional energy flows, with the crucial Strait of Hormuz -- through which about a fifth of global oil transits -- effectively closed off.

The war has also fuelled fears of a fresh energy crisis that could ramp up inflation.

The Frankfurt, Madrid and Milan stock markets each shed around four percent in midday deals, while Paris and London lost close to three percent.

"European markets are being hit hard as the full inflationary impact of the war in Iran truly comes home to roost," said Joshua Mahony, chief market analyst at Scope Markets.

The European Central Bank's chief economist Philip Lane said in an interview with the Financial Times published Tuesday that a lengthy Middle East conflict and sustained drop in energy supplies could trigger a "spike" in eurozone inflation and hit regional growth.

- Threat to energy supplies -

New strikes were reported Tuesday across the Middle East, including Israeli bombardment on Lebanon and a drone attack on the US embassy in Saudi Arabia's capital Riyadh.

The conflict started with US and Israeli strikes on Iran over the weekend, which sparked retaliatory Iranian attacks and showed no sign of abating as it entered its fourth day.

Iran has unleashed missiles and drones across the Middle East, including at Saudi Arabia, Qatar and Dubai, while threatening explicitly to drive up global energy costs.

A general in Iran's Revolutionary Guards threatened to "burn any ship" seeking to navigate the Strait of Hormuz.

The Dutch TTF natural gas contract, considered the European benchmark, shot up more than 40 percent to over 60 euros Tuesday -- its highest level since January 2023, in the wake of the price spike triggered by the Ukraine war.

European natural gas prices surged 50 percent on Monday after Qatar's state-run energy firm said it had halted liquefied natural gas production.

The rise in energy costs could give most central bankers a headache as they look to bring down inflation while also cutting interest rates to support their economies.

"A spike in energy prices creates a dilemma for central banks," said Rodrigo Catril at National Australia Bank. "Stagflation makes central banks very uncomfortable, a longer-lasting energy shock is inflationary and at the same time it weakens growth."

The dollar, seen as a safer bet in times of economic unrest, extended gains against major rivals.

Asian equities extended Monday's losses.

Seoul, which has surged more than 40 percent this year on the back of a tech rally, led the retreat by diving more than seven percent as investors returned from a long weekend.

Tokyo shed more than three percent while Hong Kong, Shanghai, Sydney, Wellington, Taipei and Jakarta were also sharply lower.

Airlines were again among the biggest losers in the region, with Tokyo-listed Japan Airlines down more than six percent, Cathay Pacific down 2.8 percent in Hong Kong and Qantas losing 1.8 percent in Sydney.

The price of gold fell four percent and silver plunged more than 12 percent as investors piled into strategic bets on energy and the dollar, said analyst Kathleen Brooks at trading platform XTB.

- Key figures at around 1140 GMT -

West Texas Intermediate: UP 7.4 percent at $76.44 per barrel

Brent North Sea Crude: UP 7.9 percent at $83.73 per barrel

London - FTSE 100: DOWN 2.7 percent at 10,492.12 points

Paris - CAC 40: DOWN 2.9 percent at 8,148.26

Frankfurt - DAX: DOWN 3.8 percent at 23,697.93

Tokyo - Nikkei 225: DOWN 3.1 percent at 56,279.05 (close)

Hong Kong - Hang Seng Index: DOWN 1.1 percent at 25,768.08 (close)

Shanghai - Composite: DOWN 1.4 percent at 4,122.68 (close)

New York - Dow: DOWN 0.2 percent at 48,904.78 (close)

Euro/dollar: DOWN at $1.1595 from $1.1688 on Monday

Pound/dollar: DOWN at $1.3285 from $1.3399

Dollar/yen: UP at 157.88 yen from 157.31 yen

Euro/pound: UP at 87.28 pence from 87.23 pence

O.Schlaepfer--VB