European stocks fall 0.4% as Iran tensions send oil past $115

(Bloomberg) — European stocks are set to open lower Tuesday after stocks in Asia pulled back from record highs and the dollar strengthened following an exchange of fire between the US and Iran, escalating Middle East tensions and fueling inflation concerns.

“Even if the immediate conflict de-escalates, we expect the aftershocks will remain with us for some time,” said Darrell Cronk at Wells Fargo Investment Institute. “The effects — on energy prices, industrial activity, and geopolitical risk premia — are unlikely to fade quickly.”

MSCI’s Asia Pacific Index for equities fell 0.4% from its highest ever close on Monday, while Wall Street gauges also edged lower from their peak. The dollar, a haven during the conflict, strengthened against all of its Group-of-10 peers. The moves came after global benchmark Brent crude jumped 5.8% to over $115 a barrel on Monday, before easing slightly to just under $113 in Asian trading.

The renewed tensions threaten to derail a month-long rally in risk assets that had helped global equities erase war-related losses. Investors are now focused on the Strait of Hormuz, a critical waterway for global energy supplies that has been blocked for months, keeping energy prices elevated and risking higher inflation and slower economic growth for energy-dependent regions like Europe.

Strait of Hormuz in Focus

The US said it fought off Iranian attacks while assisting two vessels through the Strait of Hormuz, a key chokepoint that handles over 20% of the world's total oil consumption. The action came after a plan announced by President Donald Trump to help vessels through the waterway. Tehran had warned it would strike US forces if they came near Hormuz.

Hundreds of vessels were seen clustering near Dubai on Tuesday, as more ships moved away from the strait in response to Iran’s efforts to widen its area of control. Meanwhile, the UAE blamed an Iranian drone strike for a fire at its Fujairah port and issued several missile alerts, a first since a truce between Washington and Tehran took hold.

Cross-Asset Reaction

The flight to safety was evident across markets. The Bloomberg Dollar Spot Index was little changed after a strong advance, with the euro falling 0.1% to $1.1679. Gold edged higher to about $4,537 an ounce on signs of dip-buying.

In fixed income, Treasury 10-year futures climbed 2/32, trimming a drop from the US session where 30-year yields pushed to 5% for the first time since July. Traders are boosting wagers that the Federal Reserve will have to reverse course and raise interest rates to curb the inflationary impact of surging oil prices.

“Asian markets are likely to trade with a cautious bias,” said Ritesh Ganeriwal, head of investment at Syfe Pte in Singapore. “This isn’t a full-blown risk-off move yet, but more of a geopolitical wobble that could show up in pockets of Asia — particularly energy-sensitive sectors and FX.”

This article is for informational purposes only and does not constitute investment advice.