Oil prices surged on Monday as the U.S. moved to impose a blockade on Iranian shipping after the collapse of weekend peace talks, while the dollar rose and stocks and bonds fell.
The U.S. move, aimed at putting pressure on Tehran, leaves a fragile ceasefire hanging in the balance and no end in sight to the choke on Middle East energy exports - though the mood on trading floors leaned toward hoping for a resolution.
Brent crude futures LCOc1 were up 7% at $102 a barrel - a gain of more than 40% since the war shut navigation of the Strait of Hormuz. Europe's STOXX 600 index .STOXX was down 0.8%, while S&P 500 futures ESc1 fell 0.6%.
U.S. Treasuries traded lower, leaving yields on benchmark 10-year notes US10YT=RR up 2 basis points at 4.33%, while bonds in Europe also came under modest pressure, pushing benchmark German 10-year yields up 1 bp to 3.06% DE10YT=RR.
"Markets, as the week gets underway, are trading in rather ‘textbook’ risk-off fashion, as participants reach once more for the ‘conflict escalation’ playbook," Pepperstone strategist Michael Brown said.
"Losses are seen elsewhere, with equity futures in the red on both sides of the pond, gold rolling over, and govvies facing some headwinds too. All these moves, though, it must be said, are relatively contained in the grand scheme of things," he said.
The Wall Street Journal reported Trump and his advisers were weighing limited strikes on Iran, though there were no immediate reports of attacks in the Asia day.
Trump said on Sunday that the price of oil and gasoline may remain high into the midterm elections in the U.S. in November, a rare acknowledgement of the potential political fallout from the war.
"The market is now largely back to conditions before the ceasefire, except now the U.S. will block the remaining up to (2 million barrels) Iranian-linked flows through the Strait of Hormuz as well," said MST Marquee analyst Saul Kavonic.
"The key remaining question is if the U.S. renews strikes on Iran, raising the risk of strikes on energy infrastructure across the region which could have a further lasting impact beyond the duration of the war."
Dollar Higher, Inflation Picks Up
In foreign exchange trade, the euro EUR= fell about 0.3% to $1.1692 and risk-sensitive currencies such as the Australian dollar AUD= slipped a little further. FRX/
The steep rise in energy prices has prompted investors to prepare for the possibility that a number of central banks, such as the European Central Bank and Bank of England, will lean towards raising rates, marking a sharp reversal from expectations prior to the war for rate cuts or a prolonged pause.
Last week's U.S. inflation data showed consumer prices rose by the most in nearly four years in March, driven by a record surge in the cost of gasoline. Money markets show traders see less than a 20% chance of the Federal Reserve cutting rates this year.
In emerging markets, the Hungarian forintHUF= was up sharply, scaling multi-year highs on the dollar and euro EURHUF=, after Hungary's nationalist leader Viktor Orban lost power, after 16 years, to an upstart centre-right coalition in Sunday's election.
The result is likely to pave the way for European Union funding to flow to Hungary and Ukraine.
"The positive political developments have triggered a powerful rally for the forint," MUFG currency strategist Lee Hardman said.
"The price action reinforces the forint’s position as one of the best-performing emerging market currencies this year."
(Reuters - Additional reporting by Scott Murdoch in Sydney; Editing by Vidya Ranganathan, Aurora Ellis, Deepa Babington, Shri Navaratnam, Kate Mayberry and Kevin Buckland)
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