Markets entered a tentative mood as the trading week wound down, with investors responding to comments that a fresh round of talks between the U.S. and Iran could take place over the weekend. That prospect helped push oil prices below the $100 a barrel threshold and supported a softer tone for traditional safe-haven assets.
Yet market participants remained aware that the strategic Strait of Hormuz is still mostly closed, a condition that leaves open the real possibility of hostilities resuming. The conflict, which began on February 28 with U.S.-Israeli strikes on Iran, has produced an energy shock significant enough for the International Monetary Fund to cut its outlook for global growth.
Higher energy costs, disruptions to supply chains and weaker growth expectations are weighing on the outlook for European companies, from airlines to retailers, even as some market participants anticipate healthy first-quarter corporate earnings. Those headwinds are already visible in downgraded forecasts across affected sectors.
Investor behaviour has shifted markedly since the outbreak of fighting. In March, markets were unsettled and investors sought the safety of the U.S. dollar. A two-week ceasefire in early April, together with indications of a possible peace agreement, sparked a sharp risk-on move that helped many major equity indices recover to levels seen before the war. The dollar has largely given back its earlier safe-haven gains.
Sentiment received another boost when a 10-day ceasefire between Lebanon and Israel came into effect on Thursday. By Friday, however, market activity cooled as traders prepared for a potentially decisive weekend of diplomacy. European futures pointed to a muted open, while Asian stocks were lower on the session but on track for a strong weekly increase.
In the United States, equities have rallied back to record highs following the Iran-driven selloff in March, with some signs suggesting the rebound could extend further. The conflict has also highlighted the growing influence of commodities in global geopolitics, a dynamic that is affecting currency performance.
Currencies tied to commodity exporters - including the Norwegian krone, the Canadian dollar and the Australian and New Zealand dollars - have been relatively well placed to outperform larger peers. Conversely, the Japanese yen is once again trading near the 160 per dollar mark, although the perceived need for intervention appears less pressing than earlier in the episode. Bank of Japan Governor Kazuo Ueda notably avoided indicating that a rate increase is imminent this month.
Key development to watch: euro zone trade balance for February.
With traders preparing for a potentially consequential weekend, market moves remain sensitive to both diplomatic developments and persistent physical constraints on energy routes. That combination is keeping risk sentiment fragile even as some asset classes rally.