Stocks slide as Middle East conflict fans inflation fears

By Gregor Stuart Hunter

SINGAPORE, March 3 (Reuters) - Stocks resumed their selloff and the dollar strengthened in early Asian trading on Tuesday as investors considered the implications of U.S. and Israeli strikes on Iran on energy prices and the global economy.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 1% to extend losses for a second day, led by a 2.5% tumble in Korean shares, while Tokyo's Nikkei 225 slumped 0.8%. S&P 500 e-mini futures were down 0.2%.

"Economic policy uncertainty was already elevated and now with the Iran conflict, the geopolitical risk is expected to rise too," said Rupal Agarwal, Asia quant strategist at Bernstein in Singapore. "Last time both spiked was in 2022 during the Russia-Ukraine conflict, which didn't work well for Asian markets."

Stocks on Wall Street stabilised after a volatile session on Monday which saw the S&P 500 rally from an early selloff to close flat and the Nasdaq Composite climb 0.4%, as investors bought the dip in markets after the conflict in the Middle East spilled over into Lebanon.

With no end to hostilities in sight, an official from Iran's Revolutionary Guards said on Monday that the Strait of Hormuz is closed to marine traffic and the country will fire on any ship trying to pass.

Oil and gas prices jumped on Monday, with Brent crude futures surging as much as 13% to $82.37 a barrel, highest since January 2025, before settling up 7.1% at $78.07 a barrel. In natural gas markets, benchmark European and Asian LNG prices leapt by around 40% on Monday.

The surge in energy prices complicates the Federal Reserve's efforts to keep inflation under control, with policymakers already showing signs of division around the impact of artificial intelligence on the U.S. economy.

ISM manufacturing data released Monday showed activity grew steadily in February, but a gauge of prices at the factory gate raced to a near 3-1/2-year high amid tariffs, highlighting upside risks to inflation even before the U.S.-led attack on Iran sent oil prices rocketing.?

Fed funds futures are pricing an implied 97.5% probability that the U.S. central bank will remain on hold at its next two-day meeting on March 18, according to the CME Group's FedWatch tool. The odds of a June hold, previously below 50%, edged up on Monday and are now slightly better than a coin-toss.

The U.S. dollar index , which measures the greenback's strength against a basket of six major peers, held close to a six-week high at 98.494 as the Iran strikes rattle market nerves and the currency regained some of its allure as a safe haven.?The yield on the U.S. 10-year Treasury bond was last down 1.9 basis points at 4.0288%.

Gold edged up 0.2% to $5,336.99. Bitcoin nudged down 0.1% to $69,348.85, while ether was up 0.3% at $2,050.50.

(Reporting by Gregor Stuart Hunter)