Stocks fall as energy price jump ignites inflation fears

NEW YORK – Stock indexes around the world fell while the dollar rose on Tuesday, as a widening conflict in the Middle East created safe-haven demand and pushed oil prices up sharply, exacerbating investor concerns about inflation.

Oil futures settled up more than 4% after hitting their highest levels since 2024 after Iran disrupted shipping in the Strait of Hormuz, through which a fifth of the world’s oil and liquefied natural gas typically passes. The war, in its fourth day, has intensified as Israeli and U.S. forces pounded targets across Iran, prompting Iranian retaliatory strikes around the Gulf while Israel also attacked Lebanon.

On Tuesday, President Donald Trump sought to justify a broad, open-ended war on Iran saying he had “a feeling” Iran would attack after nuclear negotiations stalled.

Israel’s military said it struck an Iranian compound aiming to develop “necessary capabilities” for nuclear weapons, without providing evidence.

Wall Street indexes pared losses and closed down by 1% or less. European stocks closed down more than 3% and MSCI’s Asia Pacific index finished off 3.5%. South Korea led declines in Asian markets with a weaker won helping to send the KOSPI down 7.2%.

“How much this war is disproportionately hitting Europe and other oil-importing countries is really being highlighted right now in the markets,” said Kevin Gordon, head of macro research & strategy at Charles Schwab, New York.

In oil markets, U.S. crude settled up 5.1%, or $3.57 at $74.80 a barrel for its highest settlement since June after rising more than 6% on Monday and Brent ended at $81.87 per barrel, up 5.13%, or $4.13, on the day after a 6.7% rally in the prior session.

“This damage is being done because the war keeps spreading,” said Schwab’s Gordon but he cautioned that the market is currently driven mostly by news headlines and that the “potential for whiplash in parts of the market is very high, because of that.”

On Wall Street, indexes lost ground but closed well above their session lows. The Dow Jones Industrial Average fell 403.51 points, or 0.83%, to 48,501.27, the S&P 500 fell 64.99 points, or 0.94%, to 6,816.63 and the Nasdaq Composite fell 232.17 points, or 1.02%, to 22,516.69.

MSCI’s gauge of stocks across the globe fell 20.05 points, or 1.91%, to 1,029.78 while the pan-European STOXX 600 index finished down 3.08% after hitting its lowest level since late January.

Cboe’s Volatility index, also known as Wall Street’s fear gauge, closed up 2.13 points at 23.57 for its highest closing level since November 20. Its session high was 28.15.

Looking at trends following past military actions, Jack Ablin, chief investment officer at Cresset Capital, said inflation expectations tend to peak in the first 20 trading days after conflicts start but noted that “right now, though, it’s all about uncertainty.”

“The broadening trade is doing better, at least on a relative basis, with value outperforming growth. But overall, risk appetites are lower as Iran hits out at non-military targets with drones, and goes after regional oil facilities while trying to inflict chaos.”

Bonds muted, dollar in demand

U.S. Treasury yields eased from session highs. The yield on benchmark U.S. 10-year notes was up 1.1 basis points to 4.063%, from 4.052% late on Monday.

The 30-year bond yield rose 0.4 basis points to 4.7020% and the 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 2.1 basis points to 3.508%, from 3.487% late on Monday.

In currencies, the U.S. dollar climbed to multi-month peaks against the euro, sterling and yen as investors sought safe‑haven assets and worried about prolonged global inflation.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, rose 0.53% to 99.04, with the euro down 0.65% at $1.1611.

Against the Japanese yen, the dollar strengthened 0.12% to 157.56 while sterling weakened 0.34% to $1.3359.

In cryptocurrencies, bitcoin fell 1.52% to $68,275.16.

Gold closes some shine

The surge in energy prices also 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 Marco Rubio said on Monday.

On Monday, ISM manufacturing data 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.

In precious metals, gold prices were weighed down by a stronger dollar and fading prospects of a rate cut.

Spot gold fell 4.56% to $5,083.94 an ounce. U.S. gold futures fell 3.63% to $5,102.00 an ounce. Spot silver fell 8.48% to $81.85 an ounce, hitting its lowest level since Feb. 20.

(Reporting by Gregor Stuart Hunter and Rae Wee in Singapore, and Lucy Raitano in London, Sinéad Carew in New York, Suzanne McGee in Providence: Editing by Kirsten Donovan, Emelia Sithole-Matarise, Nick Zieminski, Chizu Nomiyama and David Gregorio)