Conflict escalation and panic spreading! Spot gold falls below $5,000 mark, Dow Jones drops over 1,200 points

On Tuesday during the U.S. trading session, the three major U.S. stock indices fell sharply, erasing Monday’s gains. As the U.S.-Israel conflict with Iran leads to disruptions in Middle Eastern energy exports, global oil and gas prices surged significantly, and market sentiment quickly shifted to caution.

The Dow Jones Industrial Average dropped over 1,200 points, expanding its decline to 2.5%. The S&P 500 fell 2.5%, and the Nasdaq declined 2.7%. In tech stocks, sectors that led the rebound on Monday generally retreated on Tuesday, with Nvidia and Broadcom each falling about 2%. U.S. storage chip stocks came under pressure, following the sharp declines in South Korea’s storage chip sector. Among the S&P 500 components, almost all sectors declined except for oil and energy stocks.

International benchmark Brent crude futures broke above $84 per barrel, rising 8% on Tuesday after already gaining 6% on Monday.

Market risk aversion was widespread on Tuesday, with spot gold falling below $5,000 per ounce, hitting a new low since February 20 and dropping over 6% intraday.

The “fear index” — the CBOE Volatility Index (VIX) — rose to its highest level since November last year, reflecting increased market panic.

The U.S. dollar index continued to strengthen, currently at 99.52, up 1% for the day. The Australian dollar fell 2% against the dollar, the New Zealand dollar declined 1.5%, and the euro dropped 1.2%.

As the conflict enters its fourth day, signs of escalating tensions in the Middle East are becoming more apparent: Iran has increased attacks, with drones hitting the U.S. embassy in Riyadh, Saudi Arabia; the U.S. State Department has ordered the evacuation of personnel from Bahrain, Iraq, and Jordan.

So far, Saudi Arabia, the UAE, Oman, and Kuwait have successfully intercepted most missiles and drones targeting energy facilities, ports, and airports. However, if their missile defense and drone countermeasures are depleted over time, the situation could worsen further.

Rising energy prices have pushed U.S. Treasury yields higher. Investors worry that the surge in energy costs could reignite inflation pressures, while markets are currently betting on the Federal Reserve cutting interest rates further to support the economy.

Analysts note that if the conflict persists, it could reignite inflation and hinder the already fragile economic recovery in Europe and Asia.

The previous day, U.S. stocks experienced a significant rebound as investors, following Wall Street’s usual “geopolitical conflict trading script,” bought the dip, expecting the conflict to be resolved quickly and not to have a substantial impact on the economy. However, the current situation appears to be exceeding expectations, and investors are beginning to sell off most assets.

Vital Knowledge analyst Adam Crisafulli stated in a report: “After initially showing calm on Monday regarding the Middle East war, market anxiety increased sharply overnight. Investors are worried that after the Iranian government and military leadership are weakened or ‘decapitated’ by the U.S., Iran may launch long-term retaliatory attacks, continuing to target key economic and energy infrastructure in the region for weeks to create chaos. Although U.S. and Israeli military forces hold an absolute advantage in the region, they cannot intercept every cheap missile and drone, especially as their interceptors are rapidly depleting.”

More concerning is that after Iran destroyed Qatar’s liquefied natural gas facilities, European natural gas prices surged sharply, with futures increasing over 70% in two days.

In the U.S., gasoline prices are a key political sensitive indicator. Currently, gasoline prices have risen above $3 per gallon for the first time since November last year. Just weeks ago, President Trump claimed to have pushed oil prices down to $2 per gallon.