Amid the climate of uncertainty, investors were buying dollars in search of safe-haven assets.
Crude oil prices rose by around 28%, the largest daily gain since at least 1988, after having already posted another 28% increase the previous week, further supported by production cuts from major Middle Eastern producers.
Iran designated Mojtaba Khamenei to succeed his father, Ali Khamenei, as Supreme Leader, a signal that hardliners remain in control in Tehran as the conflict with the United States and Israel enters its tenth day.
The move did not appear intended to improve relations with U.S. President Donald Trump, who had previously described the son as "unacceptable." With no signs of an end to hostilities and oil tankers not yet venturing across the Strait of Hormuz, investors braced for a prolonged period of high energy costs.
This context radically changes the landscape for major central banks, some of which were considering—before the start of the war—cutting interest rates. Now, the risk of higher inflation will spark a delicate debate over what course to take within the Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of England.
In this regard, the Fed will analyze February inflation figures in the United States on Wednesday, although they will logically not yet reflect the impact of the war.
Despite the jitters in financial markets, some observers believe the stock market retreat will not last, as they see it as unlikely that the Middle East conflict will be overly prolonged or that inflation will spiral out of control.
"We are probably at the worst point of this passing shock this week. Keep a cool head. Expand positions as soon as signs of stabilization/rebound appear," Bankinter analysts said in a daily report.
"At first it will be unstable and we will think we have rushed in, but we will soon see that is not the case. We will only have to act like this for about 2 weeks at most," they added.
Following a 7% drop last week, at 0802 GMT on Monday, the Spanish benchmark IBEX 35 was down 537.40 points, or 3.15%, at 16,537.00 points, while the FTSE Eurofirst 300 index of leading European shares fell 1.51%.
Since the start of the war, the IBEX has lost about 1,800 points, or nearly 10%, based on Monday's prices.
At 0802 GMT on Monday, the Spanish benchmark IBEX 35 was down 537.40 points, or 3.15%, at 16,537.00 points, while the FTSE Eurofirst 300 index of leading European shares fell 1.51%.
In the banking sector, Santander lost 4.31%, BBVA fell 3.78%, Caixabank shed 3.53%, Sabadell dropped 2.84%, Bankinter was down 3.21%, and Unicaja Banco lost 3.36%.
Among major non-financial stocks, Telefónica fell 2.10%, Inditex shed 3.28%, Iberdrola dropped 2.34%, Cellnex fell 2.36%, and the oil company Repsol rose 0.96%.
(Reporting by Tomás Cobos; edited by Benjamín Mejías Valencia)
