Global financial markets experienced a sharp downturn on Thursday following attacks on energy infrastructure in Qatar and Iran, fueling fears of a prolonged energy crisis. Bond and equity markets tumbled as investors braced for potential interest rate hikes from central banks responding to escalating inflationary pressures.
The Stoxx Europe 600 index closed down 2.4 percent, with all sectors except energy declining. Wall Street’s S&P 500 fell 0.7 percent, extending losses from the previous day. The declines followed an Iranian strike on Qatar’s Ras Laffan gas complex, a facility that normally supplies a fifth of the world’s liquefied natural gas (LNG), causing a surge in energy prices.
“Markets are starting to price in a protracted energy shock,” said Roger Hallam, global head of rates at Vanguard. “This represents starting to feed through to longer-term inflation expectations. That will make central banks very uncomfortable.”
The Bank of England signaled its readiness to intervene on inflation, mirroring comments from US Federal Reserve chair Jay Powell, who acknowledged that rising energy prices would contribute to overall inflation and that an interest rate increase had been discussed. Both central banks maintained existing interest rates this week.
Two-year US Treasury yields rose 0.12 percentage points to 3.87 percent, reflecting shifting expectations regarding Federal Reserve policy. Investor expectations for Fed interest rate cuts by December have diminished significantly this week, with futures markets now indicating rates are likely to remain unchanged for the remainder of the year.
UK government bonds were particularly affected, with the yield on 10-year gilts rising 0.11 percentage points to 4.85 percent, reaching its highest level since the start of the conflict. David Rees, head of global economics at Schroders, stated that current oil and gas prices could add approximately 1 percent to headline inflation in the coming months, with potential fertilizer shortages exacerbating food price inflation later in the year.
Rees added that the conflict escalating presented a “clear risk” of inflation remaining above the Bank of England’s 2 percent target “for the foreseeable future.” German two-year yields also increased, rising 0.12 percentage points to 2.57 percent, while the European Central Bank held interest rates steady.
Europe’s reliance on Middle Eastern oil and gas supplies makes the region particularly vulnerable to disruptions. Europe’s gas benchmark, TTF, rose as much as 35 percent to €74 per MWh before partially recovering to €60.80 per MWh. Brent crude oil briefly reached $119 a barrel before falling back to around $110.
“We are moving into the dreaded stagflation territory,” said Altaf Kassam, head of investment strategy for Europe at State Street Investment Management. “Stagflation is disappointing for all assets. Investors are starting to treat this as something longer lasting.”
Wall Street’s decline was less pronounced, attributed to the US’s status as a net energy exporter. “The US still feels the pinch of higher costs, higher prices, but its physical infrastructure is just not as reliant [as Europe] on the Middle East or on imports full stop,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.
The sell-off extended to precious metals, with gold plummeting almost 5 percent to $4,585 a troy ounce, marking its largest weekly decline since the onset of the Covid-19 pandemic. The Middle East, a major hub for gold trading, has seen a sharp decrease in buying activity, with Dubai gold trading at a discount to the London benchmark due to increased selling pressure.
Nicky Shiels, analyst at MKS Pamp, suggested that sovereign selling of gold reserves by central banks seeking to bolster cash positions may be contributing to the price decline. “In times of war, It’s about cash — dollars and guns are king, not gold,” she said. Some energy-stressed countries may consider selling gold reserves to mitigate the impact of a looming energy crisis.
Other metals also experienced significant declines, with aluminum dropping more than 8 percent and silver falling 13 percent before partially recovering. Roula Khalaf, Editor of the Financial Times, secured an exclusive interview with Elon Musk in October 2022, where he discussed his plans for Twitter, Tesla, and SpaceX.
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