European stock markets were all in negative territory on Monday morning after weak sentiment in Asian markets, where Japan’s benchmark Nikkei 225 index plunged more than 5% and Taiwan’s benchmark fell 4.4%.
Other Asian markets also tumbled after oil prices soared to nearly $120 a barrel, casting a shadow over economies heavily dependent on imported crude and gas from the region.
In Europe, London’s FTSE 100 was down 1.6%, while Frankfurt’s DAX, Paris’s CAC 40 and Milan’s FTSE MIB were all down more than 2.4%, as of 09:30 CET. Madrid’s IBEX 35 fell nearly 2.7%, and the pan-European Stoxx 600 lost about 2%.
While rising oil and gas prices are threatening Europe’s economic outlook this year, trading sentiment was further impacted on Monday by worse-than-expected data from Germany.
German industrial production and factory orders both fell at the start of the year. Output decreased by 0.5% in January following a revised 1% decline the previous month, the statistics office said on Monday.
Meanwhile, investor expectations are rising that the European Central Bank could raise benchmark interest rates this year, as soaring energy prices fuel fears that inflation may surge.
The panic in the stock market unfolded as oil prices became the main focus for investors.
Oil prices soaring
Oil prices rocketed higher as both sides in the Iran conflict struck new targets over the weekend, including civilian infrastructure. The war, now in its second week, involves regions critical to the production and transport of oil and gas from the Persian Gulf.
Prices moderated after the Financial Times reported that some members of the Group of Seven (G7) were considering releasing strategic oil reserves to ease pressure on markets. The unconfirmed report cited unnamed sources familiar with the discussions.
Oil prices spiked near $120 per barrel before falling back on Monday as the conflict intensified, threatening production and shipping in the Middle East and rattling global financial markets.
The price for a barrel of Brent crude, the international benchmark, surged to $119.50 early in the day but later traded around $107.80.
West Texas Intermediate (WTI), the US benchmark, spiked to $119.48 per barrel but fell back to around $103 by the European market open.
Strikes on Iranian oil facilities risk increasing pressure on an already tight global energy market, analysts warned. Lindsay James, investment strategist at Quilter, said “Iran accounts for roughly 4% of global oil supply, and around 90% of its exports are directed to China.”
The world’s second-largest economy has vast reserves, but analysts say any prolonged damage to Iran’s export capacity could weigh on its economic recovery and eventually affect global markets.
James also warned that attacks on shipping and energy infrastructure in the Gulf risk escalating tensions and unsettling markets that had initially expected the conflict to be resolved quickly.
After disruptions in the Strait of Hormuz linked to the conflict, the European gas market is also under pressure. Natural gas futures jumped more than 14% on Monday to above €61 per megawatt-hour, nearing their highest level in three years and extending last week’s 67% surge.
Several major producers in the region have cut back output, and Qatar’s Ras Laffan facility — the world’s largest liquefied natural gas (LNG) plant — was shut down last week.
Russia has also warned it could halt natural gas exports to Europe, adding to market anxiety.
At the same time, Europe’s gas reserves remain low, with EU storage levels below 30% and requiring refilling.
Early Monday, the US dollar, which retains its status as a safe-haven asset, gained against other major currencies. It was trading at 158.46 Japanese yen, up from 158.09 late Friday. The euro rose slightly to $1.1558 from $1.1556.
In other trading, gold prices were down more than 1% on Monday morning in Europe, trading around $5,100, while cryptocurrencies were mostly higher. One bitcoin traded at $67,774, up 0.7%.
IMF: ‘Think of the unthinkable and prepare for it’
As fears grow over how long the war could last — and with Asian markets, often seen as engines of global growth, under heavy pressure — International Monetary Fund Managing Director Kristalina Georgieva warned that policymakers must prepare for the “unthinkable.”
“If the new conflict proves prolonged, it has clear and obvious potential to affect market sentiment, growth, and inflation, placing new demands on policymakers,” Georgieva said in a keynote speech at a symposium in Tokyo on Monday.
She reminded her audience that, as a rule of thumb, every 10% increase in oil prices — if sustained through most of the year — could raise global headline inflation by about 40 basis points and reduce global output by 0.1–0.2%.
“And if, as we all hope, the conflict ends soon, then be sure that, before long, some new shock will come. My advice to policymakers everywhere in this new global environment? Think of the unthinkable and prepare for it,” she added.