European equities slipped on Friday as investors weighed the widening economic consequences of the escalating conflict involving Iran, a confrontation that has rattled energy markets, pushed crude prices above $100 per barrel, and forced traders to rethink the global interest-rate outlook.
The region-wide STOXX Europe 600 Index fell 0.6% in early trading, extending a sharp selloff that has seen the benchmark lose about 6.1% so far in March — its steepest two-week decline in roughly a year.
The downturn underscores how rapidly financial markets have shifted from optimism about falling inflation and imminent interest-rate cuts to renewed anxiety about energy shocks and prolonged geopolitical instability.
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Futures tied to the S&P 500 also traded cautiously, slipping 0.1% after the index fell 1.5% in the previous session, reflecting broader global unease.
At the center of the turmoil is the surge in crude prices triggered by disruptions to Middle Eastern energy infrastructure and fears that key shipping routes could remain closed for an extended period. Brent crude futures rose to about $100.30 a barrel, while West Texas Intermediate crude traded near $95.98. Both benchmarks began the year around $60, meaning prices have climbed roughly 40% since the war erupted in late February.
The surge represents one of the fastest oil price rallies in recent years and is already raising concerns that the global economy could face a renewed inflation shock just as central banks believed price pressures were easing. Much of the anxiety stems from the threat to the Strait of Hormuz, the narrow maritime corridor through which roughly a fifth of the world’s oil shipments pass.
Iran’s new supreme leader, Mojtaba Khamenei, has vowed to keep the waterway closed, raising the prospect that tankers transporting crude from the Persian Gulf could remain blocked for weeks or even months. The closure has been a huge cause of concern due to the significance of Hormuz. Sustained disruption to shipments through the strait removes millions of barrels of oil from the global market, tightening supply at a time when demand from major economies remains resilient.
Temporary Relief From Russian Oil License
Oil prices eased slightly on Friday after the United States issued a 30-day license allowing countries to purchase sanctioned Russian oil and petroleum products that had been stranded at sea. The move effectively releases additional barrels into the global market, providing short-term relief to refiners scrambling to secure supply.
But analysts say the measure offers only temporary breathing room and does little to address the deeper issue — the growing risk that Middle Eastern oil flows could remain disrupted for an extended period.
Against that backdrop, currency markets are swinging toward the dollar as investors flee to safety.
The dollar has gained about 2.5% since the conflict began and is on track for its second straight weekly rise. The stronger currency has weighed heavily on most of its peers. The euro slipped 0.5% to around $1.1457, while the Japanese yen weakened sharply to about 159.4 per dollar after briefly touching its lowest level since July 2024.
Authorities in Japan warned they were prepared to intervene in currency markets if volatility intensified, although analysts say sustained dollar strength could limit the effectiveness of any unilateral action.
Inflation fears have also upended central bank expectations, marking a significant shift in interest-rate decisions. Until recently, investors had been betting that central banks would begin cutting rates this year as inflation cooled across advanced economies.
But the surge in energy prices has complicated that outlook. Markets now expect only around 20 basis points of rate cuts from the Federal Reserve this year — less than half the roughly 50 basis points of easing priced in just a month ago. Two-year U.S. Treasury yields, which closely track expectations for monetary policy, climbed to a six-month high on Thursday and have risen about 35 basis points since the war began.
Wolf von Rotberg, equity strategist at Bank J. Safra Sarasin in Zurich, said investors are increasingly focused on how long the conflict might last.
“If we don’t make any progress and just have a status quo for a prolonged period, that would obviously mean that oil prices stay higher for longer, and we have a more pronounced impact on the economy and on inflation,” he said.
Energy Costs Threaten Corporate Profits
Higher oil prices are also raising concerns about corporate profitability and economic growth. Energy costs ripple through nearly every sector of the economy, from manufacturing and transport to agriculture and consumer goods.
If crude remains near $100 or climbs higher, businesses could face sharply rising operating expenses just as demand shows signs of slowing in parts of the global economy. That combination — higher costs and weaker demand — can squeeze profit margins and potentially trigger a broader slowdown.
Jose Torres, senior economist at Interactive Brokers, said the surge in oil prices is reverberating across multiple asset classes.
“Indeed, sinking optimism about Fed rate reductions amid strengthening cost pressures is weighing on traditional safe havens such as silver, gold and government debt,” he said.
Gold rose slightly to around $5,088 an ounce on Friday but remained on track for a weekly decline, reflecting the drag from rising bond yields.
Attention is now shifting to a series of central bank meetings scheduled for next week. Policy decisions are expected from the Federal Reserve, European Central Bank, Bank of England, and Bank of Japan.
Most economists expect policymakers to keep interest rates unchanged while they assess the impact of the energy shock on inflation and growth. The Reserve Bank of Australia, however, is widely expected to raise rates, highlighting how persistent inflation pressures remain in parts of the global economy.
For investors, the key risk is that the conflict could drag on and keep oil prices elevated for months. Such a scenario would complicate efforts by central banks to bring inflation down while avoiding a slowdown in economic activity.
Vasu Menon, managing director of investment strategy at OCBC Bank, warned that markets may face continued turbulence.
“With the possibility of higher oil prices still elevated, investors should be prepared for continued volatility and potentially further downside in the near term,” he said.