The war in the Middle East has plunged financial markets around the world into turmoil for a second day, with oil and gas prices surging and share indices plummeting days after the US-Israel attack on Iran.
After a calm Monday, US stocks fell sharply after trading opened on Tuesday, with the Dow dropping more than 2% before paring back those losses. At Tuesday’s closing, the Dow had dropped 400 points, or 0.8%, while S&P and Nasdaq saw similar dips.
Earlier in the day, the London stock market dropped deep into the red, with the FTSE 100 index closing 2.75% lower, it’s biggest one-day fall since Donald Trump’s “liberation day” tariff shock 11 months ago. Almost all listed stocks fell.
In Asia, stock markets also tumbled, with Japan’s Nikkei down 3.1% and South Korea’s Kospi plunging 7.2%.
Brent crude, the global oil benchmark, jumped a further 6% to nearly $83 a barrel. The month-ahead UK gas price has jumped by 30%, to 148p a therm, adding to Monday’s 44% surge to reach almost double its levels last week and a three-year high.
Soaring global energy prices will jeopardise Rachel Reeves’s plan to conquer inflation and revive sluggish UK economic growth, economists have warned.
The pound hit its lowest level against the US dollar in almost three months – falling about 0.8% against the dollar, or about one cent, to $1.33.
Bitcoin fell 2.3%, while gold – which surged on Monday amid a rush into safe haven investments – dropped by nearly 5%, to $5,072 an ounce.
UK government borrowing costs also rose on Tuesday morning. The interest rate, or yield, on two-year, 10-year and 30-year bonds all surged by around 10 basis points. The city anticipates that an interest rate cut is much less likely, given fears of an inflation spike.
As the conflict, sparked by US-Israeli airstrikes on Iran since Saturday, has expanded across the region, with Israel launching fresh attacks on Tehran and Beirut on Tuesday, money markets now see just a 29% chance that the Bank of England lowers interest rates at its next meeting, on 19 March. That is down from 80% last week.
This will disappoint borrowers hoping for cheaper interest rates, and is a blow to Reeves, who has taken the credit for the six rate cuts since August 2024 and has vowed to tackle the cost of living crisis.
The rise in oil and gas prices is expected to drive UK inflation higher, after it fell to 3% in January from 3.4% in December.
Jess Ralston, the head of energy at the research group Energy and Climate Intelligence Unit, said: “The energy crisis commission warned that the UK remained dangerously underprepared for another energy crisis.
“Nobody knows exactly how the next few weeks will play out, but with homes and businesses still facing the debt and after-effects of the last gas crisis, people will understandably be concerned.”
The markets also anticipate fewer US interest rate cuts this year. At the end of last week, the swaps markets priced in 61 basis points of cuts by the US central bank, but this has fallen to below 50 points – which would mean fewer than two quarter-point cuts from the Federal Reserve this year.
“Stubbornly high oil and gas prices could impact economies around the world. Specifically, they could be inflationary and disrupt plans to cut interest rates,” said Jemma Slingo, a pensions and investment expert at Fidelity International.
The International Monetary Fund said on Tuesday that “disruptions to trade and economic activity surges in energy prices and volatility in financial markets” because the crisis in the Middle East added to an “already uncertain” global environment. However, the ultimate impact will depend on the extent and duration of the conflict.
