Brent crude futures jumped to within 16 cents from $120 a barrel

Oil prices initially rose on Thursday as Ukraine’s war sparked a commodities rush that led to ‘stagflation’ fears, while stock markets slumped as investors gauge the impact of the Federal Reserve’s plans to tighten monetary policy.

The fresh surge in energy prices has heightened concerns about the European economic outlook, sending the euro to its lowest level in nearly six years against the British pound and consolidating near 21-month lows against the dollar.

Brent crude futures, the international oil standard, jumped to within 16 cents from $120 a barrel before dented by hopes that the United States and Iran will soon agree on a nuclear deal that could add production to a tightly-supplied market.

Prices of aluminium, copper and nickel soared to new highs as widening sanctions imposed on Russia over its invasion of Ukraine threatened to further disrupt the flow of goods from one of the world’s major producers.

The jump in commodity prices has raised concerns about the potential for stagflation – when high inflation and stagnant production destabilize the economy and undermine jobs.

Investors fear the Fed’s reaction to stagflation more than they fear stagflation itself, said Christina Huber, chief global market strategist at Invesco.

We will see a flash of stagflation, she said. But the markets will be comfortable with that if they feel the Fed will be comfortable with that.

Markets are volatile, prompting investors to try to discover a lot of the moving parts ‘in one fell swoop,’ said Jeff Mortimer, director of investment strategy at BNY Mellon Wealth Management.

Markets are trying to reassess what the Fed will do and its views on inflation, he said. For us, it’s how to deal with inflation that’s going to be six, nine, 12, 15, 18 months from now. That’s the really important question.

US stocks initially rose, extending their rally on Wednesday after Powell watered down widely held expectations of a 50 basis point interest rate hike when policymakers meet in two weeks.

But stocks later fell after Powell told a Senate committee on the second day of his testimony to Congress that Russia’s war in Ukraine could hurt the US economy from rising prices to weak spending and investment.