LONDON, United Kingdom — Global stocks mostly sank Friday after oil prices topped $91 a barrel, as worries intensified that Israel’s war with Hamas could spiral into a broader conflict with major crude producer Iran.
Sentiment was further rocked by fears the US Federal Reserve might not cut interest rates as much as previously expected, with the focus now on upcoming key jobs data.
Oil steadied after international benchmark Brent bulldozed its way overnight to a five-month peak of $91.30 and New York’s WTI struck a similar high on simmering geopolitical woes in the crude-producing Middle East.
READ: Oil settles at five-month high, gains capped by jump in US stocks
The dollar held steady before the US nonfarm payrolls report, which is a key indicator of the health of the world’s largest economy.
‘Escalation of tensions’
Optimism was at a premium on trading floors after the deadly strike on the Iranian consulate in Damascus, which Tehran blamed on Israel and threatened retaliation.
“The risk-off tone to markets is driven by an escalation of tensions in the Middle East, after Israel said that it had increased preparations for a retaliatory strike by Iran after Israeli forces attacked Iran’s diplomatic compound in Syria earlier this week,” said XTB analyst Kathleen Brooks.
READ: As Israel-Hamas war reaches 100-day mark, here’s the conflict by numbers
“Ever since the Israel/Hamas war started in October, the bigger risk for geopolitical security and thus for financial markets, has been a war between Iran and Israel,” she said.
That prospect sent prices up more than one percent Thursday, stoking fears of elevated global inflation that could delay rate reductions.
Friday’s stock sell-off followed a plunge across the board on Wall Street that analysts said could also be partially blamed on profit-taking after a months-long rally that has seen several indexes hit records this year.
‘Storm clouds’
Minneapolis Fed chief Neel Kashkari said Thursday that there was a chance of no US rate cuts this year, sending Wall Street diving — and with shock waves reverberating across Asia and Europe on Friday.
READ: Fed’s Kashkari sees two rate cuts at most this year
“Storm clouds circled equity markets as investors started to fret about when interest rates would be cut given heightened inflationary pressures from oil… and negative comments from a key figure,” said Russ Mould, investment director at stockbroker AJ Bell.
“Kashkari questioned if the US central bank needed to cut rates at all this year if we continued to see sticky inflation.
“On paper, the argument in favor of holding rates is growing by the day even though investors would dearly love to see cut after cut to relieve the financial pressures on consumers and businesses.”
Confidence in three Fed cuts this year, beginning in June, is being tested by a string of recent data indicating the US economy remains in rude health, while bank officials have done little to soothe concerns.