LONDON/SYDNEY: Share markets fell on Monday as the inflationary jolt from surging oil prices threatened to raise living costs and interest rates around the globe, while investors desperate for liquidity fled to the US dollar.
Crude oil futures soared almost 30 percent to nearly $120 a barrel, one of its biggest one-day jumps on record, threatening to raise costs of products from gasoline to jet fuel. Brent crude futures were last up nearly 13 percent at $104.5 a barrel, while US futures were up 12 percent at $101.8.
Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as Supreme Leader, signalling that hard-liners remained firmly in charge a week into the war with the US and Israel.
That was unlikely to be welcomed by US President Donald Trump, who had declared the son “unacceptable.”
With hostilities continuing in the Middle East and tankers unable to cross the Strait of Hormuz amid the threat of Iranian drone attacks, investors were bracing for a long stretch of higher energy costs.
Investors await Washington’s response, said Helima Croft, head of global commodity strategy at RBC Capital Markets. “With no clear definition of what winning looks like, it is hard to forecast whether this will be a multi-week or multi-month conflict.”
Asian markets sink
The news was sobering for Japan, a major importer of oil and gas, with the Nikkei closing down 5.2 percent after a 5.5 percent drop last week.
China, another big oil importer albeit with a huge stockpile of crude saw its blue-chip index fall roughly 1 percent.
China on Monday said inflation had already picked up in February before the current oil spike, with consumer prices rising 1.3 percent on the year. This is not necessarily a negative development, given the country has long struggled with disinflation.
The wave of market selling swept over Wall Street as S&P 500 futures shed 1 percent, while Nasdaq futures were down over 1 percent.
European shares tumbled to their lowest in more than two months on Monday, with the pan-European STOXX 600 down 1.63 percent in a third session of losses. The benchmark index shed 5.5 percent last week, its worst weekly performance in nearly a year.
In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. Yields on 10-year Treasury notes rose 5 basis points to 4.175 percent, up from a trough of 3.926 percent just a week ago.
Central banks face inflation conundrum
Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, though disappointing jobs numbers seemed to argue for stimulus.
Data on US consumer prices due on Wednesday is forecast to show the annual rate holding at 2.4 percent in February.
The Fed’s preferred measure of core inflation due on Friday is forecast to hold at 3 percent, well above the central bank’s 2 percent target, and analysts see a risk of an even higher number.
The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.
For the Bank of England, markets have shifted to pricing just a 40 percent chance of one more easing, compared with two cuts or more before the Middle East conflict started.
Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.
The dollar strengthened 0.4 percent to trade at 158.385 yen, outweighing safe-haven demand and pushing gold down 1.2 percent to $5,106 an ounce. The euro slipped 0.5 percent to $1.1557.
