Global markets hit by economic chaos as Iran attack sends gas and oil prices soaring

The military escalation between the United States, Israel and Iran is once again shaking the Middle East and jeopardising oil supplies.

The attacks in the Strait of Hormuz, which transfers 20 per cent of the world's crude oil, have forced shipping and oil companies to seek alternative routes.

The spike in prices by nearly ten per cent reflects the tension. Brent crude has surged to 78 dollars per barrel ahead of the opening of European markets.

Much more notable is the rise in gas, which has surged 25 per cent in the face of a potential supply crisis. "The recent escalation between the US, Israel and Iran has injected a considerable geopolitical risk into markets, mainly through oil. While history suggests that such shocks are typically short-lived for equities, elevated index levels increase vulnerability in the short term," Julius Baer analysts say.

Stock markets, which had been trading near record highs, are now heading for sharp losses, with declines exceeding three per cent in Spain's Ibex 35, which fell back to 17,789 points.

Within the benchmark index, there are some exceptions, such as Repsol, which is up eight per cent on the back of the surge in oil prices, and Indra, rising a further four per cent amid gains in the defence sector.

By contrast, other stocks are suffering from uncertainty surrounding the potential economic impact. Airline shares are plunging across European markets, with some, including IAG, initially unable to set an opening price in early trading. Others, such as Inditex, are also down more than five per cent amid expectations of a slowdown in consumer spending.

In equity markets, experts say the main transmission channel is energy (both oil and liquefied natural gas), rather than direct trade exposure, which remains negligible for Western economies. "A sustained increase in oil prices would tighten financial conditions, squeeze profit margins and revive concerns about stagflation, even in a global economy that is structurally less dependent on oil," they say.

In this climate of tension, investors are seeking refuge in gold, which is up more than 2.8 per cent to close to 5,400 dollars, and strong currencies such as the Swiss franc, which is soaring to a decade-high against the euro and the dollar. The country's central bank has already announced that it is prepared to intervene to prevent this sharp appreciation of its currency.

In a recent analysis, Amadeo Alentorn, head of investments in Jupiter AM's systematic equity, said that although alternative routes exist (such as the East-West pipeline from Saudi Arabia and the pipeline from the UAE to the port of Fujairah), they have limited capacity and cannot fully compensate for the total closure of the Strait.

This leads to a price spike and implies risks to the global economy. "Oil fuels cars, trucks, ships and planes. It is used to make plastics, synthetic fibres, solvents, detergents and paints. It makes it more expensive to transport goods by truck, plane or ship and to produce petroleum-based goods. Companies pass on higher transport and production costs to consumers. Inflation is rising all over the world," Alentorn says.

In this context, the interest rate cuts that equity investors were expecting in the US have been shelved, and with them the hopes of new highs in global stock markets, which are once again looking with trepidation at the risk of prolonged geopolitical tensions.