Stocks tumble and oil prices surge as Mideast war dims economic outlook

The Big Picture: Global stock markets continued their slide on Friday, while oil prices surged, as the lack of a diplomatic breakthrough in the four-week-old Middle East conflict darkens the global economic outlook.

Why it matters: The war is creating a toxic cocktail for the global economy. The disruption of oil supplies through the Strait of Hormuz is pushing energy prices higher, which in turn fuels inflation. Central banks may be forced to raise interest rates to combat this inflation, which slows down economic growth and makes investors nervous, leading them to sell off stocks. This chain reaction affects everything from the cost of filling up your car to the value of your retirement account.

Here’s a look at the market reaction:

• Stocks Down: On Wall Street, the Dow, S&P 500, and Nasdaq all finished lower, marking their fifth consecutive week of declines. The Dow is now officially in a “correction,” down more than 10% from its recent high. European and Asian stock markets also fell.
• Oil Up: Brent crude, the international benchmark, rose over 4% to settle at $112.57 a barrel. The continued blockage of the Strait of Hormuz, a chokepoint for about 20% of the world’s oil supply, is the primary driver.
• Bonds and the Dollar: Government bond yields rose as investors bet that central banks will keep interest rates higher for longer to fight inflation. The U.S. dollar also strengthened as investors sought a safe haven amid the uncertainty.
• Consumer Confidence Wanes: The impact is already being felt. U.S. consumer sentiment fell to a three-month low as higher oil prices hit household budgets and soured the economic outlook.

What’s next: Markets are desperate for tangible signs of de-escalation. Until there is a credible diplomatic resolution that reopens the Strait of Hormuz and calms fears of a wider conflict, investors are likely to remain in a “risk-off” mood. This means continued volatility in the stock market, upward pressure on oil prices, and a strong U.S. dollar.