Rising oil prices and fears of contagion in European bond markets triggered a global sell-off after President Donald Trump indicated that major combat operations against Iran could resume.
Brent crude climbed to $104 a barrel as investors reacted to reports that the Pentagon was preparing operations targeting Iranian energy, infrastructure and nuclear sites. Trump said he was prepared to continue the conflict despite the effect on fuel prices and his falling poll ratings.
“I think the deal isn’t really something that I want to do, but they’re willing to offer us anything to stop,” he said late on Wednesday.
An Israeli official said the prospect of renewed operations had become a more prominent subject of discussion, although the chances of action before the midterm elections were considered low. The official said the likelihood would increase significantly after the elections.
European bond contagion fears return
Shares fell across Asia and Europe, while US stock futures moved into negative territory before trading opened in New York. The S&P 500 futures contract was down 0.39 per cent after the index fell 0.22 per cent in the previous session.
In Europe, the Stoxx 600 dropped 0.85 per cent in early trading and the FTSE 100 was down 0.46 per cent. South Korea’s Kospi fell 2.62 per cent, Japan’s Nikkei 225 declined 1.42 per cent, India’s Nifty 50 lost 0.42 per cent and China’s CSI 300 slipped 1.09 per cent.
France’s 10-year government bond yield, which had fallen over the previous two days, rose again to 4.92 per cent. Analysts Ed Yardeni and Elias Griepentrog said the move was signalling the risk of a looming French debt crisis.
Jim Reid and colleagues at Deutsche Bank said the events of the previous 24 hours had brought European contagion risk back into focus, with spreads widening sharply across several countries.
Paul Donovan of UBS said higher crude and diesel prices were damaging for both bonds and equities. He warned that central banks could not simply offset an oil-driven inflation shock without imposing restrictive policies that risked pushing the wider economy towards recession.
Bitcoin was trading at $82,973 as markets absorbed the prospect of a renewed military escalation and the accompanying pressure on energy prices and government borrowing costs.
