- European stocks, US futures slide
- Energy price spike stokes inflation fears
- Iran vows to close Strait of Hormuz
- Korean benchmark share index plunges 7.2%, leads Asia declines
SINGAPORE/LONDON, March 3 (Reuters) - A selloff in stocks deepened and the dollar strengthened on Tuesday, as widening conflict in the Middle East fuelled a spike in energy prices that raised investor concern about the impact on the global economy.
Europe's benchmark STOXX 600 index fell 2.7% in early trading - on track for its biggest daily decline since April - following a 1.7% drop on Monday.
U.S. S&P 500 e-mini futures were down 1.6%, suggesting the selloff may engulf Wall Street later following a volatile session on Monday that saw the S&P 500 rally from an early decline to close flat and the Nasdaq Composite climb 0.4%.
On Monday, U.S. President Donald Trump sought to justify a broad, open-ended war on Iran, saying the campaign was ahead of expectations.
Front and centre on traders' minds is a dramatic surge in oil and natural gas.
"For Western Europe, the most notable development is another surge in natural gas prices... which is bringing back quite a lot of fears of potentially a repeat of what we saw in 2022, when Russia invaded Ukraine," said George Moran, European macro strategist at RBC Capital Markets.
"It feels like the market is interpreting this as much more of an inflationary shock than a growth shock. Of course, it could still have a growth impact," he said.
In natural gas markets, benchmark European LNG prices leapt by 25%, having jumped 39% on Monday, while U.S. natural gas futures were up nearly 6%.
Qatar halted its production of liquefied natural gas (LNG) on Monday, prompting precautionary shutdowns of oil and gas facilities across the Middle East. Qatari LNG production makes up about 20% of global supply.
An official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz was closed to marine traffic and the country would fire on any ship trying to pass.
Brent crude futures tacked on another 4.2% to $80.96 on Tuesday, up more than 11% on the week. A basket of European oil and gas stocks has risen 1.2% this week.
WORKING THROUGH THE RISK SCENARIOS
Investors are grappling with the uncertainty over how long the conflict might last, with no end to hostilities in sight.
The U.S. embassy in Riyadh was hit by two drones resulting in a limited fire and some material damage, the kingdom's defence ministry said in a post on X on Tuesday.
"Events like that are adding to fears about a more protracted conflict," wrote Deutsche Bank research analysts in a morning note. They added that there are signs investors are still pricing the conflict as temporary rather than protracted.
"In particular, it has mainly been the front end of energy curves that have seen sharp spikes, while longer-dated contracts have moved much less," they wrote.
On Tuesday, Prime Minister Benjamin Netanyahu said he expected the war against Iran was "not going to take years".
The surge in energy prices complicates the Federal Reserve's efforts to keep inflation under control, with policymakers already showing signs of division around the impact of artificial intelligence on the U.S. economy. The U.S. will take action to mitigate rising energy prices due to the spike in the price of oil, Secretary of State Rubio said on Monday.
ISM manufacturing data released on Monday showed U.S. activity grew steadily in February, but a gauge of factory gate prices raced to a near 3-1/2-year high amid tariffs, highlighting upside pressure on inflation even before the attacks on Iran.
Fed funds futures are pricing an implied 95.4% probability that the U.S. central bank will hold rates at the end of its two-day meeting on March 18, according to the CME Group's FedWatch tool. The odds of a June hold, previously below 50%, edged up on Monday and are now slightly better than a coin-toss.
The dollar index , which measures the performance of the U.S. currency against six others, held close to a six-week high at 99.07 as investors shunned those currencies they perceive to be most vulnerable to higher energy prices. The yield on the U.S. 10-year Treasury note was up nearly 5 basis points at 4.1%.
With the dollar holding strong, gold was down 1.2% at $5,266 an ounce. Bitcoin fell 3.6% to $66,925.7.
Additional reporting by Gregor Stuart Hunter and Rae Wee in Singapore, and Lucy Raitano in London: Editing by Kirsten Donovan and Emelia Sithole-Matarise
Source: Reuters