Oil prices surge and stocks slide as fresh inflation fears return

Oil prices surged and stocks plummeted on fresh inflation concerns on Thursday, following reports that President Donald Trump might launch additional strikes on Iran before the upcoming US midterm elections. The decline mirrored a retreat on Wall Street, where tech companies retreated from recent gains, grappling with higher borrowing costs and geopolitical uncertainty.

Crude oil began the week on a weak note due to signs that Middle East exports were approaching pre-war levels and G7 nations agreed to release their reserves. However, fears grew as Iran escalated attacks on tankers in the Strait of Hormuz, Yemeni rebels denied losing key territory, and top oil officials warned global reserves were critically low.

On Wednesday, a report in The Atlantic alleged the White House had instructed the Pentagon to devise options for attacking targets in Iran ahead of the midterms, with Republicans in danger of losing both chambers of Congress. Despite the targets and scale remaining undisclosed, the report suggested a broader operation could be in the works following the November 3 polls.

Both major crude contracts rose nearly four percent on Thursday, with Brent North Sea Crude trading at $104.11 per barrel. Supply concerns also contributed to the price surge, as some Gulf of Mexico production was temporarily halted due to Tropical Storm Isaias. Although the International Energy Agency members were prepared to draw upon additional oil reserves, the market remained apprehensive.

The spike in oil prices reignited inflation concerns and exerted upward pressure on government bond yields to multi-year highs. All three major indices on Wall Street fell, with the S&P 500 and Nasdaq dropping below record levels. Asian markets followed suit, with Tokyo, Hong Kong, Sydney, Shanghai, Singapore, Seoul, Mumbai, Wellington, Taipei, Bangkok, and Manila all experiencing significant declines.

London, Paris, and Frankfurt also extended their losses at the opening bell. The South African rand weakened marginally in the morning, trading at R16.64 to the US dollar amid a stronger US currency and higher US yields. Investors are also preparing for earnings season, with tech firms under scrutiny due to their profitability and elevated valuations, compounded by substantial investments in the AI sector.

While the headline earnings figures may still be robust, the higher Treasury yields and approaching multi-decade peaks present a steeper investment hurdle, warned Charu Chanana at Saxo Markets. This season should focus more on identifying companies that exceed expectations rather than those simply surpassing consensus, she added.