A sell-off resumed on both sides of the Atlantic on Thursday as fears grew that there would be no quick solution to the conflict in the Middle East.
Initial gains in European markets, which had followed a rally in Asia, were reversed in later trading and Wall Street was also trading sharply lower in the early afternoon in New York.
The US-Israel war with Iran has driven up the price of oil and gas, raising fears of a new inflation shock and dashing hopes for interest rate cuts.
In London, the FTSE 100 closed down 1.5% or 154 points to 10,414; while Germany’s DAX and Italy’s FTSE MIB fell 1.6%. The French CAC closed with a fall of 1.5% and the Spanish IBEX lost 1.4%.
In the United States, the Dow Jones fell 2%, the S&P 500 fell 1.3% and the Nasdaq lost approximately 1%.
Meanwhile, oil prices continued to rise, with a barrel of Brent crude rising 4% on Thursday to almost $85 (£63.80). Gas prices in Europe rose more than 3%. Brent crude oil is up 15% in the last five days.
“The optimism that helped lift Asian and European markets earlier in the day evaporated like drops of water on a smoky stove,” said Danni Hewson, head of financial analysis at AJ Bell. “It is increasingly difficult to see a quick solution to the conflict in the Middle East and that, in turn, is forcing markets to take a fresh look at their interest rate expectations for the coming months.”
In the UK, the more domestically focused FTSE 250 closed down 0.9% at 22,700.20. Among the biggest fallers was Wizz Air, which canceled flights to and from Israel, Dubai, Abu Dhabi and Amman until March 15, as the airline warned of a €50m (£43m) hit to its annual profits, also reflecting the impact of higher jet fuel costs. Its shares fell 11.3%.
FTSE 100 airlines were also hit, with shares in easyJet falling 5% on Thursday and those in British Airways owner IAG down 2%.
US Treasury yields were on track to rise for the fourth straight day as higher oil prices began to cast doubt on immediate interest rate cuts by the Federal Reserve.
Markets are likely to improve if oil tankers can start moving through the Strait of Hormuz, which has effectively been closed by Iran since the weekend. About a fifth of the world’s supply of oil and liquefied natural gas passes through the Strait, located off Iran’s southern coast.
