Stocks Slip, Oil Surges as Middle East Conflict and Global Policy Moves Rattle Markets

Tensions in the Middle East escalated sharply as fighting between Israel and Iran entered its fifth day, leading to a dip in global stocks and a surge in oil and gold prices. Investors grew increasingly wary after U.S. President Donald Trump called for the evacuation of Tehran and cut short his G7 summit visit, hinting at deeper geopolitical risks. U.S. S&P 500 futures initially dropped 0.7%, while crude oil prices jumped over 2%, bringing a week-long rally to 11%.

The uncertainty was compounded by a packed week of central bank decisions, with the Bank of Japan (BOJ) kicking things off by holding interest rates at 0.5%. BOJ also announced it would slow the pace of reducing its government bond holdings to stabilize market conditions. Despite this, long-term borrowing costs remain high in Japan, and the yen strengthened modestly in response to the announcement.

In Europe, stocks mirrored the global risk-off mood, with the STOXX 600 index falling 0.7%, marking a three-week low. Investors fled to safe-haven assets like U.S. Treasuries and gold, which rose 0.3%. Meanwhile, bond yields across the eurozone remained largely steady, indicating a cautious market awaiting more clarity on the conflict and monetary policy.

Oil markets were especially sensitive to the geopolitical developments due to the Middle East’s crucial role in global supply. Although no direct disruptions to oil output have occurred, a collision between two ships in the Gulf of Oman added to jitters overnight. The potential for a broader regional conflict continues to weigh heavily on investor sentiment.

Looking ahead, all eyes turn to the Federal Reserve’s policy meeting, where rates are expected to remain unchanged. However, the spotlight will be on Fed Chair Jerome Powell’s guidance regarding future rate cuts, especially as Trump’s tariff deadlines loom. Markets are currently pricing in two rate cuts by year-end, while gold, already up 30% this year, edged higher to $3,385 an ounce amid growing demand for safe assets.

Source: Reuters