Stocks fell sharply on Wall Street as inflation fears pushed up the cost of US government borrowing to its highest level since 2007.
The Nasdaq Composite sank by as much as 1.7pc as it was swept up in a global bond market sell-off driven by concerns over the war in the Middle East.
Tensions remain high over whether a peace deal can be reached between the US and Iran to end the conflict that has sent energy prices soaring.
Oil had fallen on Tuesday, with Brent crude down 1pc below $111 a barrel, after Donald Trump said he had held off launching a new offensive in hopes of striking a deal.
But Iran’s army has warned that it would “open new fronts” against the United States if it resumes attacks.
Concerns over an extended conflict, and higher energy prices, have steadily pushed up the cost of US government borrowing during the war.
The yield on 30-year US Treasury bonds – a guide to the interest rate it pays to borrow money – has climbed from 4.61pc at the end of February to nearly 5.2pc, the highest since 2007.
Steve Sosnick of Interactive Brokers said: “After pretending this was not a problem, I think (the market) has now decided that higher yields are in fact a problem.
“But we aren’t seeing panic or anything like that.”
It comes as Britain awaits official inflation figures on Wednesday that will show how the Iran war is affecting prices.
On Tuesday, petrol prices rose to their highest level since the start of the war, with a litre of unleaded costing 158.52p.
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Thanks for following our coverage of the American stock market, as inflation fears pushed up the cost of US government borrowing to its highest level since 2007.
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Wall Street slid deeper into the red on Tuesday as a fresh selloff in global bond markets intensified fears that the Iran war and surging energy prices could keep inflation elevated for longer.
Yields on 30-year US Treasuries climbed to 5.19pc, the highest level since the eve of the 2007 financial crisis, as investors dumped government debt amid growing concerns that the Federal Reserve may be forced to raise interest rates rather than cut them.
The spike in borrowing costs rippled across markets, dragging equities lower and extending a retreat from record highs. The S&P 500 fell for a third consecutive session, while bond markets across Europe and Asia also weakened sharply.
Investors have grown increasingly nervous that the closure of the Strait of Hormuz, a key artery for global oil and gas shipments, will keep crude prices elevated and feed through into broader inflation.
Brent crude remained above $110 a barrel despite slipping around 1pc on Tuesday, and is still more than 50pc higher than before the conflict erupted following US and Israeli strikes on Iran earlier this year.
Markets were also rattled after President Donald Trump warned that the US could resume strikes on Iran within days despite a temporary pause in hostilities.
“I hope we don’t have to do the war, but we may have to give them another big hit,” Mr Trump told reporters, suggesting action could come “Friday, Saturday, Sunday ... maybe early next week”.
Iran has continued to disrupt shipping through Hormuz despite weeks of bombing campaigns, fuelling concerns over global fuel supplies and pushing US petrol prices to their highest level in almost four years.
The jump in long-dated Treasury yields also reflected mounting concern over swelling government deficits, with investors demanding higher returns to hold US debt over longer periods.
Analysts said the combination of war-driven inflation risks, elevated oil prices and rising borrowing costs was prompting investors to rotate out of risk assets and into shorter-duration positions.
Warning over Europe’s energy security as gas storage levels dip
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European gas storage levels are filling at their slowest pace in years as tighter global LNG supplies push prices higher and raise concerns over the continent’s energy security ahead of winter.
Analysts at UBS said EU gas storage sites were 36pc full in mid-May, compared with 43pc at the same point last year and below the five-year average of 48pc. Stockpiles are rising at a slower pace than normal as fewer shipments of liquefied natural gas arrive in Europe.
Benchmark European gas prices have climbed towards €50 per megawatt hour as competition for supplies intensifies.
UBS warned that recent additional LNG shipments from the Gulf were not enough to ease pressure on the market.
Europe is also facing stronger competition from Asia for US gas exports, limiting the number of cargoes available to refill storage sites before colder weather arrives. UBS said reserves may only reach around 80pc capacity before winter if current trends continue.
Oil prices fall after Trump calls off strikes on Iran
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Oil prices fell after Donald Trump said he had called off a planned US strike on Iran following appeals from Gulf allies to avoid further escalation in the region.
Brent crude, the international benchmark, fell 1.8pc to about $106 a barrel, while US benchmark West Texas Intermediate dropped towards $103, after both contracts had surged earlier this week on fears of a prolonged disruption to Middle Eastern supplies.
Markets also reacted to reports that Nato is discussing plans to help commercial vessels pass through the blocked Strait of Hormuz if the waterway remains shut into July. Any move to reopen the route sooner than expected could ease concerns over supply shortages through one of the world’s most important energy chokepoints.
Trump said Saudi Arabia, Qatar and the United Arab Emirates had urged Washington to delay military action, while Qatar said diplomatic efforts with Tehran were continuing. Iran has not confirmed any renewed talks.
Oil has swung sharply in recent weeks as investors weigh the risk of further conflict against hopes for a diplomatic breakthrough.
Nato mulls escorting commercial ships through Hormuz
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Nato is considering whether to help escort commercial shipping through the Strait of Hormuz if the vital trade route remains blocked into July, as allies grow increasingly concerned about the economic damage caused by the disruption.
Alliance officials told Bloomberg that discussions are underway about a possible maritime mission, although member states remain divided over whether Nato should become more directly involved in the crisis. Leaders from member countries are due to meet in Ankara, Turkey, on July 7-8.
Speaking at a press conference on Tuesday, Nato’s Supreme Allied Commander Europe, Gen Alexus Grynkewich, said military planners were actively thinking about the option. “The political direction comes first, and then the formal planning happens after that,” he said. “Am I thinking about it? Absolutely.”
The Strait of Hormuz carries roughly a fifth of the world’s oil and liquefied natural gas supplies during peacetime. Iran blocked the waterway after US and Israeli strikes began earlier this year, prompting sharp tensions between Washington and some European allies reluctant to be drawn further into the conflict.
Britain and France are separately developing contingency plans to help secure shipping routes once hostilities ease, according to Bloomberg, while some Nato members have already moved military assets closer to the region. However, countries including Spain remain firmly opposed to any broader military involvement.
Trump to let Warsh ‘do what he wants to do’ at Fed with interest rates
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Donald Trump said he would give incoming Federal Reserve chair Kevin Warsh free rein over interest rates, despite mounting pressure from the White House for cuts and growing market expectations that borrowing costs could instead rise this year.
“I’m going to let him do what he wants to do,” Trump told the Washington Examiner on Tuesday, describing Warsh as “a very talented guy” who would “do a good job.”
The remarks mark a softer tone from Trump after months of criticism directed at outgoing Fed chair Jerome Powell over the central bank’s reluctance to cut rates.
Warsh takes over against a difficult backdrop of rising inflation and escalating energy prices linked to the conflict with Iran, which have complicated the case for looser monetary policy.
Investors are now pricing in a greater likelihood of a rate rise than a cut before the end of the year, according to CME Group’s FedWatch tool.
US inflation rose to 3.8pc in April, while wholesale prices surged 6pc year-on-year, their sharpest increase since 2022.
Warsh, who was confirmed by the Senate earlier this month, is due to be sworn in on Friday ahead of his first Federal Reserve meeting in mid-June.
US borrowing costs highest since 2007
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US long-term borrowing costs touched their highest level since 2007 in a sign of rising worries over inflation linked to the Middle East war.
The yield on the 30-year US Treasury bonds rose to a 19-year high of nearly 5.2pc, up from 4.61pc before the US and Israel began their wave of strikes on Iran in late February.
The increase means Washington must pay higher sums to raise debt, a reflection of rising inflation risks.
Oil prices have risen around 60pc since the start of the Middle East war, as Iran has effectively closed the Strait of Hormuz to most tanker traffic.
Economists have warned crude prices could rise further if there is no agreement soon between Washington and Tehran to get shipments moving.
The surge in US borrowing costs is also affecting Britain, with the yield on 30-year gilts, as UK bonds are known, hitting their highest level since 1998 last week.
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Thanks for joining our coverage of what is happening on Wall Street, where stocks have fallen sharply over fears the Iran war drive up inflation.
The Nasdaq Composite has dropped by as much as 1.7pc to 26,207.09 as concerns over higher oil prices led to a sell-off in US bond markets.
The Dow Jones Industrial Average has fallen 0.5pc to 49,436.84 and the S&P 500 has declined by 0.9pc to 7,336.83 after the 30-year US Treasury bond yield hit its highest level since 2007.
Bond yields have been pushed higher by the war in Iran, which has sent oil and gas prices soaring. Higher rates of inflation erode the returns of bonds, meaning investors demand higher yields as compensation.
On the Nasdaq, semiconductor stocks were some of the biggest fallers after the recent exhuberance over artificial intelligence. AMD dropped by 4.6pc while ASML declined by 1.1pc.