Stocks drop, oil gains as Mideast unrest fuels inflation fears
LONDON: Stock markets mostly fell while oil prices rose as the Israel-Iran conflict added to fears over a renewed spike in inflation that could dent economic growth in major countries.
Investors had already taken a cautious stance after the US Federal Reserve kept its interest rates unchanged and warned Wednesday that President Donald Trump's trade war could reignite inflation and dampen economic growth.
"Equity markets were in the red across Europe and most of Asia," noted Russ Mould, investment director at AJ Bell, adding that investors were "spooked" by the escalating Israel-Iran conflict.
"Oil prices have shot up in recent days and any disruptions to Middle East supplies could put them even higher and stoke inflation," he said.
After gaining more than one per cent in Asian trading hours, crude futures fell back but remained higher compared with levels on Wednesday.
As fears grow of direct US participation in the strikes on Iran, analysts said there was a risk that Tehran could shut the Strait of Hormuz, a key shipping lane through which an estimated fifth of global oil supply flows.
"We don't see it as a likely scenario at this time, but... I think everybody should be watching," American Petroleum Institute president Mike Sommers told Bloomberg.
The concerns over potential supply constraints boosted share prices of major energy companies Thursday.
French oil and gas giant TotalEnergies topped the Paris CAC 40 blue-chip index, closing with a gain of 2.1 per cent, while British energy group BP advanced 1.4 per cent in London.
US stock and bond markets are closed Thursday for the Juneteenth holiday, which commemorates the end of slavery in the United States in 1865.
In Europe, several central banks took interest rate decisions on Thursday, warning that the risk of slowing growth was rising even as inflation slows.
The Swiss National Bank cut rates by a quarter point to zero per cent, a move aimed at taming the Swiss franc, a haven that has soared against the dollar since Trump launched his tariff onslaught in April.
For many investors that raised the prospect of a return to negative interest rates in Switzerland, to lower the franc but also encourage investment and spending to avert an economic slump.
Despite the rate cut, the franc rose slightly against the dollar after the rate cut.
"There are also significant downside risks to inflation from trade tensions as well as heightened geopolitical uncertainty, which could push up the value of the franc further," said Adrian Prettejohn, an economist at Capital Economics.
Norway's central bank meanwhile made an unexpected cut to its benchmark rate, saying economic uncertainty was "greater than normal" because of escalating conflicts and trade tensions.
And as widely expected, the Bank of England held its benchmark rate steady at 4.25 per cent but its governor Andrew Bailey indicated that further cuts were coming as the UK economy slows.
"Interest rates remain on a gradual downward path," Bailey said, adding that "the world is highly unpredictable".
The dollar traded mixed against main rivals Thursday after the Fed kept rates unchanged for a fourth consecutive meeting despite Trump's pressure on the central bank to lower borrowing costs.
It cut its 2025 forecast for US economic growth and raised inflation and unemployment expectations, in its first updated projections since Trump unveiled in April his levies on imports.
Fed chief Jerome Powell called the economy "still solid" but warned that "increases in tariffs this year are likely to push up prices and weigh on economic activity".
Hong Kong led stock market losses in Asia, closing down two per cent, while Tokyo shed one per cent.
Bangkok retreated as a political crisis involving Thailand's Prime Minister Paetongtarn Shinawatra put her government on the brink of collapse.
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