Escalating hostilities in the Middle East and widening stress on oil shipping and infrastructure have global investors braced for more turbulence when trading resumes Sunday.
As morning dawned in Asia, the dollar—a beneficiary of the crisis so far because of its haven status—started off strong against major peers in Sydney trading. Stock and bond futures open later Sunday.
With the conflict now in its second week, energy disruptions remained the presiding worry after several Middle Eastern nations joined Iraq in reducing oil production as storage filled up and tankers continued to avoid the critical Strait of Hormuz. Brent crude climbed some 30% last week—its biggest jump in six years—leaving it above $90 a barrel.
“Markets had held up better than you might expect through the initial shock, but damage to oil infrastructure changes the equation,” said a chief executive at a major financial institution. “This is no longer just about Hormuz being effectively shut, it is about supply disruption spreading deeper into the region, and that is the kind of shift that can push already-nervous investors to take more risk off the table.”
Overnight Sunday, Iran pressed attacks on neighboring countries, pushing the war into a ninth day, while Israel struck fuel depots in Tehran and threatened the Islamic Republic’s power grid. The US president warned the administration would consider targeting areas that weren’t previously aimed for.
Selling swept across regions and asset classes last week as the geopolitical flareup added fresh stress to markets already under pressure from technology disruptions and worries about potential cracks in credit markets. US bonds dropped the most since last year’s major tariffs rout, and the S&P 500 suffered its largest weekly loss since October. Emerging-market equities slid further, posting their biggest slump since 2020.
With inflation stuck above the Federal Reserve’s 2% target, bond traders had been scaling back expectations for rate cuts this year even before the conflict started, while pushing bets for deeper easing into 2027 should a slowdown materialize. The war prompted some traders to bet on no cuts at all this year, though an unexpectedly weak US employment report Friday pushed the consensus back closer to expecting as many as two quarter-point cuts.
Funds designed to weather shocks, such as trend following and risk parity strategies, got hit. One major risk parity ETF slipped more than almost 4%, its worst return in more than three years.
Signs of angst are deepening. The VIX volatility index surged toward 30 on Friday, pushing the spot price above its three-month futures in the largest inversion in almost a year.
“The worst is yet to come in the stock market reaction,” said a chief market strategist. “I would expect more of a risk-off mood until we get some tangible positive news.”
In the credit market, the premium investors demand for owning investment-grade bonds over Treasuries widened to a three-month high. Meanwhile, hedge funds have slashed their net exposure to levels not seen since 2022.
Despite the rising worries, some market watchers caution against taking too bearish a stance, given the chance for a de-escalation of hostilities or fresh avenues of diplomacy, with the current administration sensitive to market swings.
“You don’t want to just sell everything because you think this is going on forever,” said a market research co-founder. “This current administration is very sensitive to prices, and if things get too volatile, then they will adapt.”
