Markets entered the new trading day under heightened uncertainty after President Donald Trump vowed the United States would do "whatever it takes" to achieve its military objectives in Iran. The president's open-ended commitment coincided with an intensification of the air campaign and fresh reports of regional damage, prompting broad investor caution and renewed pressure on stock markets.
News of damage to the U.S. embassy in Riyadh, along with strikes affecting Amazon data centers in the UAE and Bahrain, added to concerns about the security of previously considered safe-haven Gulf hubs such as Dubai. Those reports have sharpened market focus on the wider economic and financial fallout that could follow a broader regional conflagration - including the potential for a jump in inflationary pressures and a negative hit to investor confidence and growth.
Energy markets were among the most immediately affected. Crude rose for a third consecutive session after Iran threatened to fire on vessels attempting to transit the Strait of Hormuz. Brent crude increased 2.5% to $79.64. At the same time, the cost to charter a supertanker hauling oil from the Middle East to China climbed to a record level, exceeding $400,000 per day, according to LSEG data.
U.S. officials signalled an intent to address the rising cost of energy. Secretary of State Rubio said Washington would take action to mitigate higher prices, with plans due to be announced later on Tuesday.
Equities were broadly weaker. MSCI's index of Asia-Pacific shares excluding Japan fell 2.3%, driven in part by a drop in Korean stocks of up to 6.5%. In U.S. equity futures, S&P 500 e-mini contracts slid 0.8% while Nasdaq e-mini futures were down 0.9%.
Currency and fixed-income markets reflected a move toward safety. The U.S. dollar index - which tracks the greenback against six major peers - remained close to a six-week high at 98.622 as market participants sought the relative stability of the dollar. Japan's Finance Minister Satsuki Katayama warned that intervention remains an option to support the yen, which has come under selling pressure amid the upheaval.
On the sovereign front, the U.S. 10-year Treasury yield edged up 0.4 basis point to 4.054%. Precious metals also benefitted from the risk-off tone, with gold advancing 0.6% to $5,359.93.
Early European futures signalled a weak open: pan-region futures were down 0.9%, German DAX futures fell 1%, and FTSE futures slipped 0.3%.
Market participants will be watching a mix of corporate and macro releases that could influence trading on Tuesday. Corporate earnings scheduled include CrowdStrike, Best Buy, Target and Sea. From a macro perspective, the Euro Zone HICP Flash for February is due, and Germany is holding a debt auction for 5-year government bonds.
Key takeaways
- President Trump's pledge to do "whatever it takes" in Iran has intensified market anxiety and contributed to stock market weakness across Asia and futures markets in Europe and the United States.
- Energy markets rose materially - Brent crude gained 2.5% to $79.64 and tanker rates from the Middle East to China hit record highs above $400,000 per day, reflecting heightened supply-route risk.
- Safe-haven flows strengthened the U.S. dollar and gold, while yields on U.S. government debt showed limited movement; currency intervention from Japan remains a live consideration.
Risks and uncertainties
- Widening regional conflict - heightened military activity and strikes in the Middle East pose risks to global growth sentiment and could amplify inflation pressures, particularly through energy channels. This directly impacts the energy and shipping sectors.
- Disruption to Gulf-based infrastructure and perceived safety of regional financial centres like Dubai may undermine investor confidence across regional financial markets and real estate sectors.
- Volatility in currencies and potential policy responses - the yen's weakness and Japan's warning of intervention, alongside a stronger dollar, introduce uncertainty for FX-sensitive sectors and multinational earnings.
Investors will also be monitoring upcoming corporate earnings and Euro Zone inflation data for clues about economic momentum and the durability of the current market reaction. The evolving security situation in the Middle East appears set to remain a central driver of market moves in the near term.