European equities plunge amid Persian Gulf military conflict

The US stock market demonstrated impressive resilience on Monday: after a morning plunge, the indices almost completely recouped their losses. By the end of the day, the Dow Jones (US30) decreased by 0.15%. The S&P 500 (US500) gained 0.04%. The tech-heavy NASDAQ (US100) closed higher by 0.13%. The recovery was driven by a powerful wave of “buy-the-dip” activity focused on tech giants with massive liquidity reserves – Nvidia and Microsoft rose by 2.9% and 1.5%, respectively. Investors view “Big Tech” as a kind of “safe haven” within the technology sector, capable of weathering periods of high geopolitical turbulence.

Additional support came from the defense and energy sectors, which were direct beneficiaries of the escalation in the Middle East. Northrop Grumman shares soared 6% in response to the launch of Operation “Epic Fury,” while Exxon Mobil added 1.1% amid the oil rally caused by the blockade of the Strait of Hormuz.
The Canadian dollar (CAD) fell to 1.37 against the US dollar, testing a monthly low. The uniqueness of the situation lies in the fact that the “loonie” failed to benefit from the 8% spike in oil prices triggered by the blockade of the Strait of Hormuz and the death of Ayatollah Khamenei. Normally, the Canadian currency rises alongside energy prices, but the current dominance of the US dollar as the world’s primary haven and Canada’s internal economic issues have completely neutralized the “oil factor.” Fundamental pressure on the currency intensified following the release of Q4 GDP data, which confirmed a 0.6% contraction of the Canadian economy – the worst performance since the 2020 pandemic. Even the fact that the manufacturing PMI reached a 13-month high in February (51 points) failed to encourage investors.

Stock markets in Europe fell sharply. The German DAX (DE40) dropped 2.56%, the French CAC 40 (FR40) closed down 2.17%, the Spanish IBEX 35 (ES35) fell 2.64%, and the British FTSE 100 (UK100) closed down 1.20%. The German DAX 40 showed the worst performance among major European floors, crashing to 24,672 – the lowest closing level since early February. The decline affected almost all sectors of the German economy, as investors fear that the escalation of war in the Middle East and the blockade of the Strait of Hormuz will lead to a new round of inflation and indefinitely delay ECB interest rate cuts.

The most devastating blow hit the tourism and aviation sectors. Lufthansa shares plummeted 4.6% (with the drop exceeding 6% at one point) due to mass flight cancellations to the region and a sharp increase in jet fuel costs. The situation is even worse for the travel giant TUI, whose stock crashed nearly 9%. Investors are pricing in not only operational losses from tour disruptions but also the risk of a global decline in demand for long-haul travel under “wartime” uncertainty.
The silver (XAG) market saw a dramatic reversal: after a 3% rising morning surge, quotes collapsed by more than 6%, ending trade near $28. This “bearish” maneuver was caused by a sharp shift in market priorities. While gold maintained its safe-haven status, silver suffered due to its industrial nature. The blockade of the Strait of Hormuz and the death of Ayatollah Khamenei created a real threat of a global energy crisis. An additional blow came from US macroeconomic statistics: the jump in the ISM Manufacturing Prices Index to 70.5 (an 11.5-point increase) shocked markets, signaling a new wave of inflation. This triggered a spike in 10-year Treasury yields and pushed the US dollar Index to a five-week high.

WTI oil prices demonstrated explosive growth, soaring by more than 12% at one point to a high since June of last year. Although quotes stabilized around $71-$72 by the close of the session, the market remains in a state of unprecedented shock. The main trigger was the de facto halt of shipping through the Strait of Hormuz. Insurance companies began mass-canceling policies or raising premiums to prohibitive levels (up to 0.4% of the vessel’s value), forcing more than 150 tankers to anchor and wait for safety.

The situation was exacerbated by a direct attack on Saudi Arabia’s energy infrastructure. Drones struck the kingdom’s largest refinery in Ras Tanura (capacity 550,000 barrels per day). Although the fire was quickly localized, Saudi Aramco was forced to temporarily shut down the facility for safety reasons. This incident confirmed analysts’ worst fears: that Iranian retaliatory strikes would target not only US military logistics but also critical nodes of the world’s energy supply. With 20% of global oil passing through the closed strait, analysts at JPMorgan and Goldman Sachs warn: if the blockade lasts more than three weeks, oil prices will inevitably break the $100 per barrel level, creating an “inflationary tsunami” for the global economy.

Asian markets traded with mixed dynamics yesterday. The Japanese Nikkei 225 (JP225) decreased by 1.35% during the session, the FTSE China A50 (CHA50) rose by 0.30%, the Hong Kong Hang Seng (HK50) dropped 2.14%, and the Australian ASX 200 (AU200) showed a positive result of 0.03%.

The Australian dollar (AUD) recovered to $0.71, partially offsetting Monday’s sharp fall. The driver of this growth was the hawkish rhetoric of RBA Governor Michele Bullock, who, against the backdrop of the Middle East crisis, shifted from a policy of patience to a readiness for action. Bullock explicitly warned that the surge in oil prices due to the conflict surrounding Iran carries serious inflationary risks for Australia and confirmed that the regulator would consider a rate hike at the March meeting. This triggered a revision of market expectations: the probability of a 25-basis-point hike in March is now estimated at 28%, with full policy tightening expected by May.