Energy up, the rest down

The Middle East conflict is deepening. Energy facilities, embassies, airports and other civilian targets are being hit from both sides — the US/Israel and Iran.

Energy and gas prices continue to move higher. Bonds and equities are being unloaded from portfolios in favour of the US dollar, as even typical safe-haven assets like gold are not meeting investors’ protection needs. Gold, for example, was down more than 4% yesterday, even as headlines grew uglier by the hour.

European stocks were again under aggressive selling pressure, with the Stoxx 600 tanking 3% during the session. Even in the FTSE 100, gains in energy names couldn’t counterweigh heavy losses across banks and commodities. Mining stocks like Fresnillo and Antofagasta — the stars of the latest rally — both fell more than 5% yesterday. Better-than-expected results from Fresnillo — supported by ongoing conflicts in Ukraine, the Middle East and geopolitical tensions involving the US, China, Russia and Venezuela that have boosted gold prices — couldn’t provide a floor. Meanwhile, Lloyds and Barclays shed around 3%, and HSBC tanked 5%.

Bank stocks are falling amid rising private credit stress. That is partly linked to the earlier software selloff across global markets on concerns that AI could disrupt business models to the extent of posing an existential risk to some companies.

Interestingly, despite the global turmoil, software stocks are rebounding. The iShares Expanded Tech Software ETF, for example, jumped 1.63% yesterday — but the damage is partly done. The earlier selloff led to notable outflows from private credit funds. Blackstone announced yesterday that it would redeem a record 7.9% of shares from its flagship private credit fund. At this stage, funding stress is more likely than AI to take down a number of these software companies.

The good news — if one can call it that — is that the stress in private credit is not comparable to the subprime crisis. The implications are therefore more likely to resemble previous periods of bank stress rather than the systemic shock of 2008. Still, the timing is far from ideal.

In the US, yesterday’s session started deeply in the red, but sentiment improved as oil prices pulled back from earlier peaks — similar to Monday. The trigger was news that the US would escort and insure tankers through the Strait of Hormuz to partly offset potential energy disruptions. US indices retraced earlier losses to close with smaller declines than their European and Asian peers. That said, it doesn’t change the broader picture, and selling pressure is unlikely to reverse unless tensions ease rapidly or energy prices fall sustainably.

US futures are in negative territory this morning, while Asian indices are under pressure again. The Nikkei is down 2.30% at the time of writing, the CSI 300 is down more than 1%, the Hang Seng is lower by around 2.80%, while the Kospi is down more than 11% today. Interestingly, DAX and FTSE futures are showing minor gains, but those gains are likely to remain fragile as uncertainty persists and sellers may outnumber dip buyers.

If global equity markets are being battered, there is a reason: rising energy prices are pushing up global inflation expectations at a time when inflation had not yet fully retreated in many economies. That, in turn, is triggering a hawkish shift in central bank expectations, pushing sovereign bond prices lower and yields higher. The higher energy prices go — and the longer they remain elevated — the greater the consequences for global growth.

It is therefore surprising to see US markets reacting only modestly to developments in the Middle East.

US gasoline prices are up 17% since mid-February and around 50% since the start of the year, reaching $2.50 per gallon. Some expect prices at the pump to rise to $3.25–$3.50 in the coming weeks.

If that materialises, upcoming rate cuts from the Federal Reserve (Fed) could quickly be taken off the table. Even Mr Walsh’s hope that AI could temper inflation would offer little relief if energy prices continue to rise — especially given that AI is energy-intensive. As a result, this week’s US jobs data may take a back seat to war headlines. Investors will still watch today’s ADP report, which is expected to show that the US economy may have added around 50K private jobs in February, but without major consequences for broad price action.

Elsewhere, preliminary euro area CPI data for February came in higher than expected. Both core and headline readings rose, whereas analysts had anticipated stable prints. Part of the renewed price pressure likely reflects higher energy prices, suggesting that upcoming inflation readings may also disappoint.

The speed of the energy price increase recalls the early months of the Ukrainian invasion and the severe consequences that Europe is still feeling, as that conflict has never fully ended.

Since the start of the war in Ukraine, Europe has relied heavily on LNG imports from the US and Qatar. If those LNG flows are also disrupted while pipeline imports from Norway and North Africa remained stable, gas prices could spike significantly. The move in TTF futures reflects the scale of concern as Europe may enter the refill season with storage levels unusually low for the end of winter. According to Gas Infrastructure Europe, EU storage stood at about 29% full as of February 28 — well below typical seasonal levels. These low inventories leave Europe with a smaller buffer heading into the injection season, increasing vulnerability should LNG or pipeline flows be disrupted and complicating efforts to rebuild reserves ahead of next winter.

How far could gas prices go? At the peak of the Ukraine-invasion led spike, TTF futures traded at levels more than ten times higher than pre-Middle East crisis norms — illustrating how extreme price moves can become under severe – and prolonged - supply stress.