Stocks slide as oil surge kindles inflation fears

NEW YORK, March 3 (Reuters) – Oil prices initially soared on Thursday as the Ukraine war sparked a run on commodities that raised fears of “stagflation,” while equity markets fell as investors gauge the impact of the Federal Reserve’s plans to tighten monetary policy.

The fresh surge in energy prices heightened worries about the European economic outlook, leading the euro to slide to its lowest level in almost six years against Britain’s pound and pinning it near 21-month lows versus the dollar.

Brent crude futures , the international benchmark for oil, climbed to within 16 cents of $120 a barrel before falling on hopes the United States and Iran will agree soon to a nuclear deal that could add output to a badly undersupplied market.

The price of aluminum, copper and nickel raced to fresh highs as the widening sanctions on Russia for its invasion of Ukraine threatened to further disrupt the flow of commodities from one of the world’s major producers.

The jump in commodity prices has raised concerns about the potential for stagflation — when rising inflation and stagnate output roils the economy and crimps employment.

“Investors are more fearful of a Fed reaction to stagflation than stagflation itself,” said Kristina Hooper, chief global market strategist at Invesco.

“We will see a flash of stagflation,” she said. “But markets would be comfortable with that if they felt that the Fed would be comfortable with that.”

Markets are volatile, leading investors to try to figure out a lot of moving parts “in one fell swoop,” said Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management.

“Markets are trying to recalibrate what the Fed will do and its views on inflation,” he said. “To us it’s how to get a handle on what’s inflation going to be six, nine, 12, 15 and 18 months from now. That is really the critical question.”

U.S. stocks initially rose, extending a rally on Wednesday after Powell eased widely held expectations of a 50 basis-point hike in interest rates when policymakers meet in two weeks.

But stocks later fell after Powell told a Senate committee in a second day of testimony before Congress that Russia’s war in Ukraine could hit the U.S. economy from higher prices to dampened spending and investment. read more

The Dow Jones Industrial Average (.DJI) fell 0.29%, the S&P 500 (.SPX) lost 0.53% and the Nasdaq Composite (.IXIC) dropped 1.56%.

In Europe, the pan-regional STOXX 600 index (.STOXX) slid 2.01%, while MSCI’s gauge of stocks across the globe (.MIWD00000PUS) closed down 0.61%.

U.S. and German government bond yields retreated as investors eyed potential monetary tightening. Money markets in Europe are now pricing in a 95% chance…