By Yoruk Bahceli and Samuel Indyk
LONDON/NEW YORK, March 19 (Reuters) - Investors reassessing the potential economic fallout from the war in Iran are selling assets across the globe, from government bonds to stocks and gold, reigniting fears that markets may become vulnerable to a bigger dislocation.
Oil prices jumped to as high as $119 a barrel on Thursday as Iran attacked energy facilities across the Middle East following Israel's strike on its South Pars gas field.
European gas prices surged 22%
in just one day, highlighting the region's energy dependency.
On Wednesday, the spread between Brent crude and U.S. West Texas Intermediate crude hit $12.05 per barrel, its widest since March 2015, signaling that the supply disruption arising from the U.S.-Israeli war on Iran is hitting international markets particularly hard.
The pain was felt globally and exacerbated by hawkish signalling from central banks including the U.S. Federal Reserve, with all G7 central banks meeting within less than 24 hours in a rare coincidence.
Traders, growing more worried about inflation risks, are no longer confident the Fed will cut rates this year and boosted the rate hike bets they've put on across Europe's central banks, which they expect to be more responsive to higher energy prices after a 2022 energy crisis sent inflation soaring.
These worries sent government bond yields from Britain to Italy and the United States surging again on Thursday.
The pain was most stark in the UK, where two-year yields, sensitive to interest rate expectations, jumped over 30 basis points (bps). They were set for their biggest daily increase since former Prime Minister Liz Truss' failed 2022 economic plan.
In a sign that investors, who analysts say have priced in a relatively short-lived conflict so far, are growing more concerned, gold fell 4%. European stocks were set for their second-biggest daily fall since the conflict broke out.
Even the dollar, a rare winner from the conflict, dropped against peers on Thursday, falling 1% against the yen and 0.6% against the euro.
"For the first time that brought energy infrastructure into the conflict," Lloyds currency strategist Nick Kennedy said, referring to the latest attacks.
"That is a clear escalation and you don't know where that ends up, so markets are right to be a bit more cautious, as it has crossed the Rubicon."
RATE HIKE BETS
The Bank of England vindicated traders' hawkish bets on Thursday, when policymakers voted unanimously to keep rates on hold, and some raised the prospect of raising rates.
Traders now price in two BoE rate hikes by year-end, having expected it would cut rates at this meeting before the war. At one point they priced in a high chance of a third move before Governor Andrew Bailey pushed back on market pricing.
"I think the Bank of England certainly came off a little bit hawkish with its concerns about inflation," said Zachary Griffiths, head of investment grade macro strategy at CreditSights in Charlotte, North Carolina. "We're more concerned about the demand destruction and growth implications of what's going on in the Middle East. And I think maybe even within today, you're seeing those two factors in conflict, and it's hard to say which one sort of wins out on a minute-by-minute basis."
At the ECB, which also met on Thursday, traders fully price in two rate hikes and a strong chance of a third by December.
Euro area and U.S. short-dated bond yields surged about 10 bps.
The hawkish repricing first gained momentum following Wednesday's Fed meeting.
(Reporting by Yoruk Bahceli and Samuel Indyk; additional reporting by Dhara Ranasinghe and Stephen Culp ; Editing by Dhara Ranasinghe)
