Stocks moved lower and commodity prices rose sharply on Thursday as a deterioration in fighting involving Iran, Israel and the United States unsettled investors and reinforced a hawkish tone from the Federal Reserve that is shaping expectations for upcoming central bank gatherings.
Iran accused Israel of striking installations at the large South Pars gas field on Wednesday and responded by pledging strikes on oil and gas targets across the Gulf, including missile launches at locations in Qatar and Saudi Arabia. The strikes on energy infrastructure sent a clear signal to markets: U.S. crude futures climbed more than 3% to $99.39 per barrel, natural gas rose by over 5%, and Brent futures traded up at $111.19 a barrel in early sessions.
Equity markets retreated as the energy shock reverberated through investor sentiment. Japan's Nikkei fell 2.5% while South Korean stocks also declined by 2.5%. MSCI's broadest index of Asia-Pacific shares outside Japan dropped more than 1%, and European futures were down in excess of 1.5%.
"This latest escalation feels like a turning point for markets because the conflict is no longer just about military headlines or Strait of Hormuz closure," said Charu Chanana, chief investment strategist at Saxo in Singapore. "It is now hitting the plumbing of the global energy system. What is unsettling markets now is the growing stagflation risk... It means this is no longer just a geopolitical story but a macro one."
The U.S. dollar held firm, buoyed by the Fed's projection that it will likely need only one more rate cut this year. At the same time, market pricing has shifted and traders are no longer fully expecting policy easing in 2026. The dollar index, which tracks the U.S. currency against six other major currencies, has risen about 2.5% since the outbreak of the war at the end of February as investors sought the relative safety of the greenback. The index was last reported at 100.16, largely unchanged in early trade but holding gains from the previous session.
Attention now turns to a busy schedule of central bank decisions. Policymakers at the European Central Bank, the Bank of England and the Bank of Japan are due to issue guidance, and markets are parsing commentary for any shift in tone that could alter interest-rate expectations. The Bank of Japan is broadly expected to maintain current rates, but market participants will watch Governor Kazuo Ueda closely for any signal of future tightening as the yen flirts with the psychologically important 160 per dollar mark.
The yen was trading around 159.76 per dollar as investors speculated about the prospect of currency intervention. Japan's finance minister Satsuki Katayama warned that authorities stood ready to "take necessary action at any time against market volatility."
Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, expects the BOJ to stay on hold while adopting a hawkish posture, with Governor Ueda likely to retain a tightening bias aimed at countering the fresh wave of import-driven inflation.
Central banks have increasingly signaled concern about the passthrough from higher energy costs. The Federal Reserve and the Bank of Canada struck a hawkish note on Wednesday in response to surging energy prices tied to the conflict, and Australia's central bank warned on Thursday that the situation could produce a severe international shock. The Reserve Bank of Australia raised interest rates on Tuesday.
"The key question for policymakers is whether higher energy costs risk de-anchoring inflation expectations or whether the shock ultimately proves transitory," said Laura Cooper, global investment strategist at Nuveen. "Rate hikes cannot increase oil supply, they can only suppress the demand response to higher prices, compounding the growth drag. Much of the adjustment to the energy shock therefore occurs organically."
Investors and policymakers therefore face a dual challenge: the immediate market impact of disruptions to energy production and the longer-term implications for inflation and growth that could influence monetary policy paths. The near-term market response has shown a preference for safe-haven assets such as the dollar, while energy-linked commodities and sectors have reacted to direct threats to supply.
With multiple central bank meetings imminent, markets will be sensitive to any shift in language that suggests a change in the expected pace of policy easing or further tightening bias in response to rising import costs. The combination of geopolitical risk feeding energy-price increases and a central bank backdrop that remains cautious is contributing to elevated volatility across currencies, commodities and equities.
As the situation develops, the interplay between supply-side shocks in energy markets and central bank reaction functions will be pivotal in shaping both near-term market moves and medium-term macroeconomic outcomes.