European Central Bank President Christine Lagarde has warned that markets are "overly optimistic" about the Iran war's economic impact, as stocks fell across Europe, Asia and Wall Street on Friday.
European stocks opened lower on Friday morning, defying pre-market expectations of gains, as investors remained sceptical about the prospects for a ceasefire in the Iran war.
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The pan-European Stoxx Europe 600 was down 1.14%, Germany's DAX slipped 1.33%, France's CAC 40 shed 0.82%, and the UK's FTSE 100 was down 0.48% at 13:00 CET.
The Euro Stoxx 50 fell 1.18% and Spain's IBEX 35 fell by 1.12%
The muted opening came despite US President Donald Trump extending his pause on strikes against Iranian energy infrastructure by 10 days to 6 April.
Pre-market US futures had pointed to gains of up to 0.4% across the major indices, but sellers returned at the open.
Three main scenarios
While the outlook for the conflict remains uncertain, UBS's global strategy team examined three possible scenarios and their impact on inflation expectations and crude prices.
In a report published Thursday and featured on Market Watch, the team said the most straightforward outcome would be a de-escalation over the coming week.
"This would represent merely a transitory shock to prices and would be unlikely to inhibit growth prospects overmuch," according to the report.
In the second scenario, a five-week disruption to shipping through the Strait of Hormuz would cut supply by 10 million barrels of oil a day, potentially pushing prices toward $120 per barrel before easing back toward $100 by the third quarter as supply normalises.
EU inflation would rise to 3.2% year on year in the second quarter, denting growth prospects by 0.2%. The US, as a net crude exporter, would feel less of the impact.
The third and most severe scenario envisions a two-month curtailment of oil exports through the strait, driving prices to $150 per barrel.
European and US inflation would hit 3.6% and 3.5% respectively, with US second-quarter growth taking a 60 basis point hit and Europe 20-30 basis points.
Lagarde warns markets are 'overly optimistic'
European Central Bank President Christine Lagarde has warned that financial markets are underestimating the severity of the economic fallout of the Iran war, saying investors may be in denial about how long the disruption will last.
Speaking to The Economist, Lagarde said the conflict represented "a real shock" that was "probably beyond what we can imagine at the moment."
She pushed back on market optimism, arguing that technical experts saw no quick return to normality given the extent of damage to energy infrastructure. "Most people are actually talking about years," she highlighted.
Lagarde also warned that the true economic consequences were only becoming clear gradually, citing supply chain knock-on effects that markets had yet to fully price in.
She pointed to helium — much of which transits the Strait of Hormuz — as an example of a critical input for microchip production whose scarcity was not yet reflected in semiconductor costs.
"We are learning almost bit by bit, day by day, what the actual consequences will be."
The caution followed a bruising session on Wall Street on Thursday.
The S&P 500 sank 1.7%, its worst single-day drop since January. The Dow Jones Industrial Average fell 1%, the Nasdaq composite slumped 2.4%
Asia fell overnight
Asian markets declined broadly. South Korea's Kospi led losses, falling 1.8% while Taiwan's Taiex shed 1.2% and India's Sensex lost 1.1%.
Tokyo's Nikkei 225 slipped 0.2%, and Australia's S&P/ASX 200 fell 0.4%. Hong Kong's Hang Seng proved the exception, edging up 0.6%.
Oil prices started climbing again on Friday. Brent crude futures rose by nearly 2% to above $110 a barrel, and the US benchmark crude rose by more than 1.5%, trading just below $96.
The Strait of Hormuz has been largely closed since the war began, though Iran has said the closure applies only to hostile vessels. Lloyd's List Intelligence reported that some ships are now paying for passage in China's yuan.
Gold rose 1.3% to $4,431.80 (€3,838) per ounce, and silver gained 2.1% to $69.39 (€60.09). The euro was trading at $1.1540, up from $1.1527.
Spirits merger and G7
In corporate news, drinks makers Pernod Ricard and Brown-Forman — owner of Jack Daniel's whisky — confirmed they have begun merger talks.
A deal would combine the world's second-largest spirits maker with the largest producer of American whiskey, as both companies navigate a prolonged industry downturn.
G7 foreign ministers continued their second day of talks in France on Friday, with the wars in Iran and Ukraine topping the agenda.
South Africa, which had been invited as an observer, will not attend after France withdrew its invitation following a US threat to boycott the gathering.
