Oil Surges, Stocks Slide, Dollar Rallies As Conflict Grips Middle East

Oil prices surged, the dollar jumped and shares slid on Monday as military conflict in the Middle East looked set to last for weeks, threatening to upend a global economic recovery and perhaps reignite inflation.

Brent jumped around 10% to $79.90 a barrel, though it had briefly topped $82.00 at one stage, while U.S. crude climbed 8.2% to $72.64 per barrel. Safe-haven gold rose 2.6% to $5,413 an ounce.

Israel launched new air strikes targeting Tehran and expanded its military campaign to include attacks on Iran-backed Hezbollah militants in Lebanon on Monday, as U.S. President Donald Trump signalled the U.S.-Israeli military assault on Iranian targets could continue for weeks.

Meanwhile, Iran's state media said a new wave of missiles was being launched from central parts of Iran towards "enemy locations". 

All eyes were on the Strait of Hormuz, through which around a fifth of the world's seaborne oil trade flows and 20% of its liquefied natural gas. While the vital waterway has not yet been blocked, marine tracking sites showed tankers piling up on either side of the strait, wary of attack or maybe unable to get insurance for the voyage.

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"At least in the short term, the disruption to global energy supply is substantial, (and) this clearly adds upside risks to the oil price," said Michael Langham, emerging markets economist at Aberdeen Investments.

He added, however, that "a global oil price shock is not the intention of the Trump administration ahead of U.S. mid-term elections in November".

A prolonged spike in oil prices would risk reigniting inflationary pressures globally, while also acting as a tax on business and consumers that could dampen demand.

OPEC+ did agree a modest oil output boost of 206,000 barrels per day for April on Sunday, but a lot of that product still has to get out of the Middle East by tanker.

Stocks Tumble

Stock markets around the world tumbled. Europe's broad STOXX 600 slid 1.7%, after Asia Pacific ex Japan shares had fallen 1.8%. U.S. S&P 500 futures were down 1.5%. Banks were to the fore, given worries about the impact on economic growth, down 3.6% in Europe, and energy-sensitive stocks such as airlines skidded, down 5% in Europe. Tech stocks also fell in Europe and Asia as investors dumped the riskier parts of their portfolio.

Energy stocks were big gainers, however, up 4% in Europe to a new record high with energy giants BP and Shell each nearly 6% higher, while European defence stocks also gained 1.3%. In the Middle East, the UAE and Kuwait temporarily closed their stock markets citing "exceptional circumstances".

And Chinese blue-chips were a rare gainer, up 0.4% though the country does get much of its seaborne oil imports from the Middle East.

The Dollar Is Back

In currency markets, the euro and pound were each down around 1% at $1.1704 and $1.3347 respectively.

The dollar was by far the biggest gainer, rallying even on safe havens such as the Swiss franc and Japanese yen. It climbed 0.6% on the Japanese yen and 0.5% on the Swiss franc to 157 yen and 0.7733 francs.

"The dollar's correlation to risk is back," said Jordan Rochester, head of fixed income and currency strategy EMEA at Mizuho.

"After nearly a year post Liberation Day of FX correlations being junk and macro frameworks out the window - this new geopolitical crisis has snapped us back to normal." The dollar's traditional role as a global safe-haven currency had been challenged by erratic U.S. policymaking. The energy moves were also relevant for currency markets given the U.S. is a net energy exporter while both Europe and Japan rely heavily on imports. In bond markets, 10-year Treasury yields nudged slightly higher to 3.969%. They briefly touched an 11-month low of 3.926% in early trade on a rush to safety, but reversed course with traders seemingly concentrating on the inflationary impact of higher oil prices and how it could make the Federal Reserve less likely to cut rates. 

Bonds had gained a bid on Friday when UK mortgage lender MFS was placed into administration following allegations of financial irregularities. Its collapse stoked wider credit fears, with well-known big banks among its lenders. MFS had borrowed 2 billion pounds ($2.69 billion).

That was also still weighing on banking stocks on Monday.

Investors also have to weather a squall of U.S. economic data this week, including the ISM survey of manufacturing, retail sales and the always vital payrolls report.

Any weakness could shake confidence in the economy after a disappointing fourth quarter but would also likely narrow the odds-on rate cuts from the Federal Reserve.

Markets currently imply a 50% chance of an easing in June and about 58 basis points of cuts this year.