Oil prices have shot higher on concerns of an extended blockade of the Strait of Hormuz, while stocks slid as investors adopted a cautious stance ahead of a US Fed rate decision and a slew of tech firm earnings.
Both main oil contracts jumped around five percent on Wednesday following a Wall Street Journal report that the United States was preparing for a prolonged blockade of Iranian ports.
Analysts warned that such a move would prompt Iran to maintain its own blockade of the Strait of Hormuz, leaving the vital oil shipping route at a near standstill.
Iran's state-run Press TV network said on Wednesday, citing an unnamed "high-ranking security source" that if the US maintains its blockade of Iran's ports and Iranian vessels, it will draw "practical and unprecedented military action" in response.
The network said Iranian leaders' "patience has limits" and if the blockade continues, "a punishing response is necessary."
"The longer the conflict persists and the Strait of Hormuz remains disrupted, the more pronounced the inflationary pressures are likely to become," said Anna Macdonald, investment strategy director at Hargreaves Lansdown.
International benchmark oil contract Brent crude for June delivery rose to $117 a barrel, its highest level since the fragile ceasefire between the US and Iran came into effect.
The dollar drifted higher against its main peers.
"The market is increasingly shifting towards a view that no longer expects a quick and lasting peace, nor an immediate reopening of the Strait of Hormuz," said Arne Lohmann Rasmussen, chief analyst at Global Risk Management.
US Fed rate decision
Meanwhile, the US Federal Reserve is widely expected to keep interest rates unchanged later in the day, with markets closely watching its guidance on inflation as energy costs soar.
With talks to end the Middle East war appearing to be at a standstill, investors' attention turned to earnings updates.
Wall Street's main stock indices dipped at the start of trading in New York.
"As with other financial markets, investors appear to be happy to sit on their hands ahead of tonight's monetary policy announcement from the Federal Reserve's FOMC, and as four constituents of the 'Magnificent Seven' prepare to release their latest earnings updates after the close," said David Morrison, senior market analyst at Trade Nation.
Investors will be paying particular attention to spending on artificial intelligence by Amazon, Google, Meta and Microsoft — and whether it is translating into revenue.
"Given the outsized weighting of these companies in the index, and the enormous capital expenditure they have announced to build AI capabilities, these results will be closely watched by investors," Hargreaves Lansdown's Macdonald added.
Tech stocks took a hit on Tuesday following a report in the Wall Street Journal that ChatGPT-maker OpenAI had missed targets on user numbers and revenue.
Stock markets in London, Paris and Frankfurt were all lower in afternoon trading, despite some major companies spiking on strong earnings reports.
Shares in Swiss banking giant UBS jumped more than four percent as its net profit rose 80 percent in the first quarter, beating expectations.
Strong quarterly profit growth led shares in German sportswear giant Adidas to jump nine percent in Frankfurt.
After a weak lead from Wall Street, Asian stock markets mostly rose on Wednesday, with Hong Kong up more than one percent.
