A selloff in stocks and government bonds deepened while the dollar strengthened on Tuesday, 3 March 2026 as widening conflict in the Middle East fuelled a spike in energy prices and raised investor concern about inflation.
Source: Reuters,
US S&P 500 e-mini futures were down 1.4% while Nasdaq e-mini futures fell 1.8%, suggesting the selloff may engulf Wall Street later following a volatile session on Monday that saw the S&P 500 rally from an early slide to close flat and the Nasdaq Composite climb 0.4%.
In Europe the STOXX 600 fell as much as 3.6% in morning trading and was last down 2.8% - on track for its biggest daily decline since April - following a 1.7% drop on Monday.
Meanwhile, government bond markets from the euro zone to the United States and Britain sold off sharply on concerns that sustained higher inflation would likely force central banks to turn more hawkish.
On Monday, US President Donald Trump sought to justify a broad, open-ended war on Iran, saying the campaign was ahead of expectations.
Front and centre on traders' minds is a dramatic surge in oil and natural gas.
"For Western Europe, the most notable development is another surge in natural gas prices... which is bringing back quite a lot of fears of potentially a repeat of what we saw in 2022, when Russia invaded Ukraine," said George Moran, European macro strategist at RBC Capital Markets.
"It feels like the market is interpreting this as much more of an inflationary shock than a growth shock. Of course, it could still have a growth impact," he said.
In natural gas markets, benchmark European LNG prices leapt by 34%, having jumped 39% on Monday, while US natural gas futures were up nearly 6%.
Qatar halted its production of liquefied natural gas (LNG) on Monday, prompting precautionary shutdowns of oil and gas facilities across the Middle East. Qatari LNG production makes up about 20% of global supply.
An official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz was closed to marine traffic and the country would fire on any ship trying to pass.
Brent crude futures tacked on another 8.9% to $84.64 on Tuesday, up more than 16% on the week.
Working through the risk scenarios
Investors are grappling with the uncertainty over how long the conflict might last, with no end to hostilities in sight.
The US embassy in Riyadh was hit by two drones resulting in a limited fire and some material damage, the kingdom's defence ministry said in a post on X on Tuesday.
"Events like that are adding to fears about a more protracted conflict," wrote Deutsche Bank research analysts in a morning note. They added that there are signs investors are still pricing the conflict as temporary rather than protracted.
"In particular, it has mainly been the front end of energy curves that have seen sharp spikes, while longer-dated contracts have moved much less," they wrote.
On Tuesday, Prime Minister Benjamin Netanyahu said he expected the war against Iran was "not going to take years".
The surge in energy prices 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 US economy. The US will take action to mitigate rising energy prices due to the spike in the price of oil, Secretary of State Rubio said on Monday.
ISM manufacturing data released on Monday showed US 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.
Fed funds futures are pricing an implied 95.4% probability that the US central bank will hold rates at the end of its two-day meeting on 18 March, according to the CME Group's FedWatch tool. The odds of a June hold, previously below 50%, edged up on Monday and are now slightly better than a coin-toss.
The dollar index, which measures the performance of the US currency against six others, held close to a six-week high at 99.168 as investors shunned those currencies they perceive to be most vulnerable to higher energy prices. The yield on the US 10-year Treasury note was up nearly 5 basis points at 4.1%.
With the dollar holding strong, gold was down 2.7% at $5,185.80 an ounce. Bitcoin fell 2.2% to $67,871.41.
