Share prices slumped on Tuesday due to worries about the effects if the West launches military strikes against the Syrian government.
European stocks suffered their biggest daily drop in two months, with the index of the region’s top 50 companies ending the session down over 2.5 percent: banks, carmakers and miners suffered most.
Shares were ditched in favour of assets less exposed to global economic conditions, such as German and US government bonds.
Some analysts said geopolitical risks were being used as an excuse for investors to cash in and take profits after recent rallies, but there is genuine worry as well.
Stefan Scharfetter, Head Trader at Baader Bank in Frankfurt, said: “A war [in that region] would mean cuts in oil supplies, especially as you don’t know who else might be drawn in, maybe the Israelis and the Iranians. We know what that means from the oil crisis and regional wars in the past, so this is not a good sign and people are selling their shares.”
Wall Street fell for a second day, but not everyone believes the negative effect will last. “This will create a temporary dip (in the US stock market), but the economic backdrop around the world is actually getting better,” said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.
“This will pass in a short number of days and the market will move higher before the end of the year,” he said.
Middle East tensions sent the price of oil spiralling higher, with Brent crude at its most expensive in nearly six months.
Another factor supporting oil prices was declining Libyan production from a month-long disruption by armed security guards, who have shut down main export terminals.
Investors have also been scurrying for safe-haven investments such as gold, which rose to its highest since early June, around $1,420 an ounce. Gold has rallied more than $200 since late June, when prices touched three-year lows.
In the currency market, the safe-haven yen and Swiss franc gained and riskier currencies like the Australian and New Zealand dollars fell as geopolitical tensions rose.
The Japanese yen was broadly firmer while the Turkish lira and the Indian rupee hit record lows.