BOSTON/LONDON, March 9 (Reuters) - Global stock prices fell on Monday, and investors seeking liquidity bid up the U.S. dollar, as surging oil prices looked likely to stoke inflation around the globe, leading central banks to raise interest rates.
Crude oil futures in London and New York soared almost 30% in early trading to nearly $120 a barrel, pushing up costs of products from gasoline to jet fuel. Oil pared gains, crossing back below $100 a barrel. U.S. crude was last up 4.32% at $94.83 a barrel and Brent stood at $98.85 per barrel, up 7.72%. Since the U.S. and Israel attacked Iran, Brent has surged by as much as 65% and WTI 78%.
Soaring energy prices triggered an initial wave of global stock and bond market selling, although those markets pared losses as oil came off session highs. The Dow Jones Industrial Average fell 0.68%, the S&P 500 dropped 0.28%, and the Nasdaq Composite dipped 0.12%.
Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as supreme leader, signalling that hardliners remained in charge a week into the war with the U.S. and Israel. U.S. President Donald Trump had declared the son "unacceptable."
With hostilities continuing and tankers fearing Iranian drone attacks unable to cross the Strait of Hormuz, investors were bracing for a long stretch of higher energy costs.
"With no clear definition of what winning looks like, it is hard to forecast whether this will be a multi-week or multi-month conflict," said Helima Croft, head of global commodity strategy at RBC Capital Markets.
GLOBAL MARKETS SINK
European shares tumbled to their lowest in more than two months, with the pan-European STOXX 600 down 1.76% in a third session of losses. The benchmark index shed 5.5% last week, its worst weekly performance in nearly a year.
The oil price spike was sobering for major oil importers in Asian markets, with Japan's Nikkei closing down 5.2% after a 5.5% drop.
China, another big oil importer albeit with a huge stockpile of crude, saw its blue-chip index fall roughly 1%.
China on Monday said inflation had already picked up in February before the current oil surge, with consumer prices rising 1.3% on the year, not necessarily a negative development, given the country has long struggled with disinflation.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, wrote in a note on Monday that the U.S. equity market may still seem placid but there are "extreme" rotations and stock dispersions beneath the surface.
"Over the past 80 years, war-induced oil shocks have not been kind to equities, as nearly every episode has catalyzed a recession and market selloff," Shalett wrote.
CENTRAL BANKS FACE INFLATION CONUNDRUM
In bond markets, the risk of rising inflation outweighed safe-haven considerations to shove yields higher globally. The moves were initially echoed in the U.S. but yields on 10-year Treasury notes then reversed, last down 0.5 basis points to 4.127%, up from a trough of 3.926% just a week ago.
Interest rate futures slipped as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, though disappointing U.S. jobs numbers seemed to argue for stimulus.
Data on U.S. consumer prices due on Wednesday is forecast to show the annual rate holding at 2.4% in February.
The Fed's preferred measure of core inflation due on Friday is forecast to hold at 3.0%, well above the central bank's 2% target, and analysts see a risk of an even higher number.
The danger of energy-driven inflation has led markets to wager the next move in rates from the European Central Bank could be up, possibly as early as June.
For the Bank of England, markets have shifted to pricing just a 40% chance of one more easing, compared with two cuts or more before the Middle East conflict started.
Nervous investors sought the liquidity of dollars while shunning currencies from countries that are net energy importers, including Japan and much of Europe.
The dollar jumped 0.3% to trade at 158.26 yen, outweighing safe-haven demand and pushing gold down about 1.37% to $5,098 an ounce. The euro slipped 0.3% to $1.158. In cryptocurrencies, bitcoin gained 2.7% to $69,039.
(Reporting by Lawrence Delevingne, Nell Mackenzie and Wayne Cole; Editing by Thomas Derpinghaus, Bernadette Baum, Susan Fenton and David Gregorio)
By Lawrence Delevingne and Nell Mackenzie
