The US stock market plunged, bonds sold off, and energy prices continued to soar on Tuesday, in a sign that markets are increasingly alarmed by the escalating war on Iran after an earlier muted reaction.
The S&P 500 was down 2.25 percent, and the tech-heavy Nasdaq Composite dropped 2.3 percent in early trading on Tuesday. The decline is notable because when markets opened on Monday, the reaction to the US-Israeli attack on Iran was muted.
European stocks sold off at an even steeper rate, with the Stoxx Europe 600 down 3.6 percent.
The decline suggests that investors are shifting their expectations of a quick Middle East war to a longer conflict.
Brent crude, the international benchmark, was trading up about eight percent on Tuesday at $83.88 per barrel. The price is up roughly fifteen percent since the US attacked Iran.
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As the war enters its fourth day, Iran appears to be targeting more energy-related assets. A fire broke out at the UAE’s Fujairah oil terminal on Tuesday, following what the emirates said was debris falling on the facility. A fuel tank at Oman’s Duqm Port was also hit.
Energy-producing states, including Qatar and Iraq, are halting production after Iran said that it would “set ablaze” vessels passing through the Strait of Hormuz. The world’s largest insurers have already said they will not provide war-risk coverage to vessels transiting the waters, which by itself will discourage transit.
Nearly a quarter of the world’s seaborne oil supplies pass through the Strait of Hormuz.
State-owned QatarEnergy said it was halting production at its Ras Laffan plant on Monday, after it was attacked by a drone.
Iraq, the second-largest oil producer in Opec, said that it had started shutting oil production at its biggest fields because storage tanks were full, Bloomberg reported on Tuesday. The vast majority of Iraqi oil is exported via the Strait of Hormuz. Iraq also has a small pipeline connected with Turkey via its autonomous Kurdish region, but Bloomberg reported that it has also been shut down.
Asia is the most exposed to a halt in oil shipments through the Strait of Hormuz, but Europe is particularly vulnerable because of its dependence on Qatari Liquefied Natural Gas.
Rising energy prices could push up inflation. In a sign that investors see those risks rising, global bonds have sold off this week with yields rising. The relationship between bond prices and yields is inverse.
Investors are betting that higher energy prices will lead to higher inflation trends, which pushes short-term interest rates set by central banks up. Bond yields and borrowing costs rise as a result.