Late-night plunge! US stocks plummet across the board! The Federal Reserve faces major uncertainties!

European and American markets suffer heavy sell-offs.

Due to tensions in the Middle East, U.S. stocks plunged across the board overnight, with the Dow, Nasdaq, and S&P 500 indices dropping over 2% intraday before narrowing losses. Major European stock indices also declined sharply, with Germany, France, and other countries’ markets falling more than 3%. Analysts point out that the U.S. stock market is increasingly worried that the Iran-U.S. conflict may last longer than expected, boosting safe-haven sentiment. The VIX fear index surged over 30% during the day.

Meanwhile, the outlook for Federal Reserve rate cuts has become more uncertain. The escalation of the Iran-U.S. conflict has driven oil prices sharply higher, reigniting inflation risks in the U.S. Traders now see the probability of a second rate cut this year at 50%, with the threshold for easing significantly raised. According to the latest reports, Neel Kashkari, President of the Minneapolis Fed, said that if U.S. inflation cools down, one or two rate cuts later this year might be appropriate, but the Middle East war could create a situation that justifies a longer pause.

Global Market Declines

On the evening of March 3, Beijing time, U.S. stocks tumbled collectively, with the Dow dropping over 1,200 points intraday, the Nasdaq falling as much as 2.74%, and both indices narrowing losses later. By the close, the Dow fell 0.83%, the Nasdaq 1.02%, and the S&P 500 0.94%.

Most large tech stocks declined, with Tesla down over 2%, Nvidia down more than 1%, while Google and Apple saw slight declines; Microsoft rose over 1%, Amazon and Netflix edged higher. Chip stocks led the declines, with SanDisk plunging over 8.6%, Micron down 8%, Intel down over 5%, ASML down 4.4%, and TSMC down 4.3%.

European markets experienced even more intense selling. By the close, Spain’s IBEX 35 fell over 4%, Germany’s DAX 30, the STOXX 50, France’s CAC 40, and Italy’s FTSE MIB all dropped more than 3%, and the UK FTSE 100 declined nearly 3%.

Joseph Tanious, Chief Investment Strategist at Northern Trust Asset Management, said, “While the fundamentals haven’t changed much compared to Monday, investors are increasingly anxious about the duration of the war and its impact on energy prices.”

On March 3, U.S. President Trump stated that if necessary, the U.S. Navy could begin escorting oil tankers through the strait to ensure the free flow of energy to the global market, easing concerns over oil prices.

Vital Knowledge analyst Adam Crisafulli noted in a recent report, “While U.S. markets reacted relatively calmly to the war on Monday, overnight anxiety quickly intensified. Investors worry that the Iranian government and military might launch long-term retaliatory actions, continuing attacks on critical economic and energy infrastructure in the coming weeks, creating regional chaos.”

Crisafulli added, “Although U.S. and Israeli forces hold a clear advantage in the region, they cannot intercept every cheap missile and drone launched by Iran, especially as missile stockpiles are rapidly depleted.”

According to CCTV News, earlier on March 3, the Israel Defense Forces issued a statement saying that earlier that day, the Israeli Air Force dispatched over 60 sorties to carry out a new round of strikes against western Iran, aiming to weaken Iran’s missile launch facilities and further solidify Israel’s air superiority over Iran.

The statement said that during this operation, the Israeli Air Force destroyed dozens of missile launchers, air defense facilities, and other missile deployment sites.

Major Uncertainty for the Federal Reserve

The tense Middle East situation has caused oil prices to surge sharply, raising concerns that if the supply disruptions become sustained, U.S. inflation pressures could resurface, and the Fed’s room to cut rates would shrink.

On March 3, Brent crude futures briefly surpassed $85 per barrel for the first time since July 2024, with intraday gains exceeding 9%. Diesel and gasoline futures also rose significantly.

According to AAA, the average U.S. gasoline price overnight increased by 11 cents to about $3.11 per gallon.

It’s important to note that U.S. gasoline prices are highly correlated with inflation because of the short transmission chain, frequent price updates, and intense competition. The U.S. Energy Information Administration states that crude oil prices are the single most significant factor influencing gas station prices in the U.S.

On March 3, Minneapolis Fed President Kashkari said that the escalation of the Iran conflict adds uncertainty to the U.S. economic outlook, making the path of monetary policy more unpredictable.

Kashkari initially expected that, by 2026, as inflation pressures eased, one or two rate cuts later this year might be appropriate. But now, facing this new shock, policymakers must observe how long it lasts and its impact. “We need to judge: how long will this shock last? How significant will the impact be?”

He pointed out that geopolitical conflicts often have unpredictable effects on inflation, so more economic data is needed to assess the situation.

Harvard Business School economist Alberto Cavallo said that if the Iran conflict causes sustained increases in oil prices, the impact could be reflected at gas stations within weeks, raising overall U.S. inflation.

Capital Economics Chief Economist Neil Shearing estimates that if oil prices stay around $100 per barrel for an extended period, U.S. overall inflation could rise by about 0.7 percentage points.

Shearing believes that if inflation is significantly driven higher by oil prices, the Fed will be “less willing” to cut short-term interest rates. The potential energy shock, combined with last year’s tariffs still passing through the price chain, could make the Fed more cautious about easing.

Currently, the market has priced in about a 50% chance of the Fed cutting rates by 25 basis points for the second time this year, down from last Friday when traders were betting on two cuts.

The sharp reversal in rate cut expectations has caused U.S. short-term Treasury yields to fall rapidly, with the two-year yield jumping 12 basis points to 3.59%.