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Stocks and bonds recouped most of their losses on Tuesday even as fears of a prolonged shock to energy prices from the conflict in the Middle East rattled global markets.
US stock markets ended the day slightly lower, with the S&P 500 and Nasdaq both down roughly 1 per cent, having fallen earlier in the day to their lowest levels in months.
The recovery could also be seen in government bonds as traders tempered bets that soaring energy prices, caused by Iran disrupting the region’s oil and gas supplies, would force central banks to refocus on inflation rather than cutting interest rates.
The two-year and 10-year yield both ended the day up 0.03 percentage points, at 3.5 per cent and 4.06 per cent respectively.
Prices recovered across asset classes after President Donald Trump said the US Navy was prepared to escort tankers through the Gulf and that the US Development Finance Corporation would offer insurance for vessels transiting the region.
Earlier in the day, Iran threatened to attack tankers attempting to pass through the Strait of Hormuz, the narrow waterway through which a fifth of the world’s oil and a quarter of its liquefied natural gas normally passes.
Brent crude oil settled at $81.40 a barrel, higher on the day but below the $85 that was hit after Iraq said it was shutting down its largest oilfields because of the lack of tankers willing to risk the journey.
Torsten Sløk, chief economist at Apollo Global Management, said: “After a fairly volatile few weeks, on the back of AI fears, a lot of people are coming to the conclusion that there are more shocks to come from oil markets, from the Middle East war more generally, and potentially from AI and private credit.”
“Cascading shocks have triggered a wave of caution and encouraged investors to be more careful with risk and cautious before making big moves,” he said.
European natural gas prices also rose, almost doubling this week, after QatarEnergy, the world’s largest LNG producer, halted production. Asian gas markets, which are heavily reliant on shipments of LNG, jumped 65 per cent on Tuesday.
The moves came as strikes escalated across the Gulf region in the fourth day of the conflict. The US closed its embassies in Saudi Arabia, Kuwait and Beirut, as the state department told Americans to leave the Middle East.
The Israeli air force said it had begun a new wave of “extensive” air strikes against the “infrastructure” of the Iranian government in Tehran, while Iran struck the US embassy in Riyadh with two drones. The US consulate in Dubai was also targeted in a drone attack late on Tuesday evening.
Iran has stepped up its strikes on energy infrastructure in the Gulf in retaliation for the US-Israeli assault, which began on Saturday.
“The market seems to be mentally transitioning from a short war to a long war,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.
The price of gold, which rose on Monday as investors sought shelter from the uncertainty, fell about 4 per cent on Tuesday, with analysts suggesting traders could be liquidating other positions to cover their losses.
“It’s panic selling,” said Emmanuel Cau, head of European equities strategy at Barclays. “This is a stagflationary scare. The market was complacent about the scale of this war.”