Stocks slump, oil gains on worsening war in Middle East

By Ankur Banerjee

SINGAPORE, March 19 (Reuters) - Stocks slid, oil prices jumped while the U.S. dollar was steady on Thursday after major escalation in the U.S. and Israel's war with Iran rattled investors while hawkish tone from the Federal Reserve set the stage for the rest of the central bank meetings.

Iran accused Israel of striking its facilities in the huge South Pars gas field on Wednesday and retaliated by vowing attacks on oil and gas targets throughout the Gulf, firing missiles at Qatar and Saudi Arabia.

The hits to energy infrastructure sent U.S. crude futures more than 3% higher to $99.39 per barrel. Natural gas rose over 5%, while Brent futures rose to $111.19 a barrel in early trading.[O/R]

In stocks, Japan's Nikkei was down 2.5%, while South Korean equities sank 2.5%. MSCI's broadest index of Asia-Pacific shares outside Japan?fell more than 1%. European futures were down more than 1.5%.

"This latest escalation feels like a turning point for markets because the conflict is no longer just about military headlines or Strait of Hormuz closure," said Charu Chanana, chief investment strategist at Saxo in Singapore.

"It is now hitting the plumbing of the global energy system. What is unsettling markets now is the growing stagflation risk... It means this is no longer just a geopolitical story but a macro one."

The dollar strengthened across the board, also buoyed by the Fed predicting just one more cut this year, although traders are no longer fully pricing in any easing in 2026.

The dollar index, which measures the U.S. currency against six other units, is up 2.5% since the war broke out at the end of February as investors have largely gravitated toward the greenback as the haven of choice.

The index was last at 100.16, little changed in early trading but holding on to Wednesday's gains.

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In a week filled with policy meetings across the globe, investors have been parsing through comments to gauge the impact of the war in the Middle East, with the European Central Bank, Bank of England and Bank of Japan due later in the day.

The BOJ, like the ECB and BoE, is widely expected to keep interest rates steady, with all eyes on Governor Kazuo Ueda for hints on future hikes as the Japanese yen loiters near the psychologically crucial 160 per dollar levels.

The yen was last at 159.76 a dollar as traders look for any hint of intervention, with Japanese finance minister Satsuki Katayama saying authorities were prepared to "take necessary action at any time against market volatiltiy".

Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, expects the BOJ to remain on hold with a hawkish stance, with Governor Ueda likely to keep a tightening bias to alleviate the new wave of import inflation.

The Fed and Bank of Canada struck hawkish tones on Wednesday in the face of surging energy prices arising from the war in the Middle East while Australia's central bank on Thursday said the conflict could lead to a severe international shock. The Reserve Bank of Australia hiked rates on Tuesday.

Laura Cooper, global investment strategist at Nuveen, said the key question for policymakers is whether higher energy costs risk de-anchoring inflation expectations or whether the shock ultimately proves transitory.

"Rate hikes cannot increase oil supply, they can only suppress the demand response to higher prices, compounding the growth drag. Much of the adjustment to the energy shock therefore occurs organically."

(Reporting by Ankur Banerjee in Singapore; Editing by Christopher Cushing)