Middle East conflict enters its fourth day! Oil and gas prices continue to rise as pessimism spreads, putting pressure on stocks and bonds.

As the conflict in the Middle East enters its fourth day, oil prices have further risen, and concerns about the prolonged conflict have led to a sharp drop in stock markets in the UK, Europe, and elsewhere. US bonds followed other bond markets lower. According to reports, Iran's Islamic Revolutionary Guard Corps commander Qasem Soleimani said in a live television broadcast that any ship attempting to pass through the Strait of Hormuz would be destroyed. "We will not allow a drop of oil to flow out of that area." Additionally, reports indicate that no oil tankers are currently passing through the Strait of Hormuz, with three British and American oil tankers being attacked in the Persian Gulf and the Strait of Hormuz. The Strait of Hormuz connects the Persian Gulf and the Gulf of Oman and is a crucial route for the export of crude oil from oil-producing countries in the Middle East such as Saudi Arabia, Iraq, Qatar, and the UAE. Approximately one-fifth of the world's oil and liquefied natural gas is typically transported through this strait. Several oil tanker owners and traders have currently suspended the transportation of crude oil, fuel, and liquefied natural gas through this strait. According to data from the international oil tanker traffic monitoring system, the speed of oil tankers sailing in the waters around the Strait of Hormuz has generally dropped to zero, indicating that shipping in the region has come to a standstill. Meanwhile, several European governments have issued urgent directives to their oil tankers flying their national flags en route, instructing them to strictly avoid the Strait of Hormuz to mitigate the security risks arising from the escalated situation. After Iran took action to block the key passage of the Strait of Hormuz for the transportation of crude oil, liquefied natural gas, and other goods, as of the time of writing, Brent crude oil rose again by more than% to $82.50 per barrel, the highest since July 2024. European natural gas futures surged more than 35% on Monday, rising nearly 38% again on Tuesday to 61.305 euros per megawatt-hour. This was due to the blockade of the Strait of Hormuz and Qatar's suspension of liquefied natural gas production following attacks by Iran. Qatar is the world's second-largest exporter of liquefied natural gas, with nearly 20% of global liquefied natural gas supply coming from Qatar, and its exports must pass through the Strait of Hormuz. In the financial markets, major stock markets worldwide fell. Following a 1.2% decline on Monday, the UK FTSE 100 index fell by 2.2% on Tuesday. European stock markets also saw similar declines, with Germany's DAX index falling by 3% and France's CAC 40 index falling by 1.8%. Airline stocks continued to be heavily impacted by the conflict-induced flight disruptions, and concerns about the economic ripple effects led to a decline in banking stocks. Susannah Streeter, Chief Investment Strategist at Wealth Club, said, "As the Middle East conflict escalates and has global implications, pessimism is spreading to the stock market." Streeter specifically mentioned the UK stock market. Concerns are mounting over sharp increases in petrol prices and household energy bills, which could have a significant impact on UK households in the coming months. She said, "As the war expands, businesses are assessing the impact of severe disruption in the region on their operations, and the London FTSE 100 index is further dropping into deep bearish territory." She also noted, "Global shipping resilience is being tested once again, with more carriers suspending transportation through the Red Sea as the crisis escalates. This will significantly increase transportation time and costs, potentially further disrupting the supply chain." In Asian stock markets, both the Japanese and South Korean markets plummeted, with the Nikkei 225 index falling over 3% and over 1700 points; the Korean Composite Index fell more than 6%, triggering a circuit breaker. A-shares also weakened, with the SSE 300 index falling by 1.54%. US stock index futures all fell, with Dow futures down by 1.75%, S&P 500 futures down by 1.80%, and Nasdaq futures down by 2.31% at the time of writing. The US dollar index (DXY) strengthened for the second consecutive trading day, rising by 0.86% to 99.23 at the time of writing; the US dollar index has risen by about 1.3% since the beginning of the week. Meanwhile, the conflict in the Middle East has triggered a global sell-off of bonds, with US bonds following other bond markets lower. The yield on the 10-year US Treasury bonds rose by 6 basis points to 4.09%, while the yields on equivalent-maturity government bonds in the UK, France, and Italy all rose by more than 10 basis points. Traders have been withdrawing their bets on Fed rate cuts, as the escalating conflict in the Middle East has driven up oil prices and may exacerbate inflation. Traders currently expect the Fed to cut rates by only 43 basis points this year, compared to the expectation of around 60 basis points last Friday. This change follows a substantial repricing in other markets - the possibility of a second rate cut by the Bank of England this year has been completely ruled out, while the European Central Bank is now seen as likely to raise its key interest rate. However, the decline in US bonds has been milder compared to other bond markets - reflecting the market's belief that domestic energy production in the US can mitigate the economic impact of global supply shocks. Benoit Gerard, a rates strategist at Natixis, said that for the European Central Bank, the main concerns are "a slowdown in economic activity and the negative impact of energy prices, which could push up inflation." As for the Fed, the situation may be slightly different, as the US is an energy-exporting country. Nevertheless, this shift has been sudden, as US bonds had just achieved their best performance in a year - benefiting from safe-haven inflows, partly due to concerns about artificial intelligence and bets on further Fed rate cuts. Given concerns about inflation, the current appeal of US bonds as a safe haven is seen as limited.