The United States and Iran exchanged mounting threats as Israel planned several more "weeks" of combat, driving energy prices higher.
Iran stated on Sunday that it would target the energy and water infrastructure of its Persian Gulf neighbors if U.S. President Donald Trump followed through on his threat to strike the Iranian power grid within 48 hours, extinguishing any hopes for an early end to the war, which is now entering its fourth week.
Trump warned that Iran had two days to fully reopen the vital Strait of Hormuz, which remains effectively closed to most vessels, with little prospect of naval protection for maritime shipping.
Markets fear that the military conflict in the Middle East will continue to push energy prices higher, triggering a global recession accompanied by a sharp spike in inflation.
In turn, these fears are prompting a reassessment of the outlook for central banks; markets no longer expect further interest rate cuts, and in some cases, hikes are being anticipated. This new scenario has penalized equity markets due to the prospect of higher financing costs for governments, corporations, and households, while also dealing a blow to bond valuations in the debt market.
Futures have erased expectations for 50 basis points of rate cuts by the Federal Reserve this year, with even a slight probability that the next move could be upward.
Regarding the European Central Bank (ECB), Goldman Sachs said on Monday it expects the institution chaired by Christine Lagarde to implement two 25-basis-point rate hikes in April and June, aligning with forecasts from J.P. Morgan and Barclays.
An interview with ECB Vice President Luis de Guindos was published on Monday, in which he stated that the bank must act if it fears that rapid price growth risks becoming entrenched.
"Today the market is broken or semi-broken, and it is better to do nothing but wait with cold blood. The development of military actions and the results that reach us will decide everything. It is likely that Wall Street will hold up much better in the afternoon than Asia and Europe... and better than it seems," Bankinter analysts noted in their morning briefing.
"There is not much more that can be said on a day like today. Except that, if a ground military campaign (by the United States and Israel against Iran) were to be carried out, the risk would be much higher and our opinion could change," they added.
At 0805 GMT on Monday, the Spanish benchmark IBEX 35 was down 338.40 points, or 2.02%, at 16,375.60 points, while the pan-European FTSE Eurofirst 300 index retreated by 1.63%.
Since the start of the war, the IBEX has lost approximately 2,000 points, or about 11% of its value.
In the banking sector, Santander lost 2.43%, BBVA fell 2.40%, Caixabank shed 1.77%, Sabadell dropped 2.05%, Bankinter declined 1.91%, and Unicaja Banco lost 2.01%.
Among large-cap non-financial stocks, Telefónica retreated 1.76%, Inditex shed 1.34%, Iberdrola declined 1.83%, Cellnex fell 1.71%, and the oil major Repsol lost 1.53%.
(Reporting by Tomás Cobos; editing by Benjamín Mejías Valencia)
