Fresh drone activity in the region added to anxiety. A strike triggered a fire at a nuclear facility in the United Arab Emirates, while Saudi Arabia said it intercepted three incoming drones. The developments came alongside heightened rhetoric from U.S. President Donald Trump, who warned that Iran must act “fast” to reach a deal.
At the centre of market concern remains the Strait of Hormuz, a critical passage for global energy flows. Shipping through the waterway has slowed to a near standstill, with only limited vessels moving as Tehran seeks to assert tighter control over the corridor that normally carries around a fifth of global oil and gas trade.
“Right now, markets are panicking as they are pricing the possibility that the Strait of Hormuz remains closed,” said George Lagarias, chief economist at Forvis Mazars.
He added a cautiously measured view of the broader impact: “As long as this is not a credit event, and we have no evidence to call this a credit event, then beyond the normal volatility seen for a market at all-time highs, I would be surprised if it causes a big rout in equities as well.” He continued, “It can be an excuse for some investors to take some money off the table, but I'd be surprised if we saw a proper correction on the back of this bond volatility.”
Energy markets responded immediately to the supply shock narrative. Brent crude rose about 1.2% to roughly $110.55 a barrel, while U.S. West Texas Intermediate gained around 1.4% to $102.48. Futures further along the curve reflected deeper concern: September contracts pushed above $100, and December reached a contract high, signalling expectations of prolonged disruption.
The combination of supply risk and geopolitical uncertainty has reinforced fears that inflationary pressures could re-accelerate, especially if energy costs remain elevated for an extended period
Fixed-income markets absorbed the strain next, with yields climbing as investors priced in the likelihood of sustained inflation and tighter financial conditions.
The yield on U.S. 10-year Treasuries hit a 15-month peak of 4.631%, extending a 23-basis-point jump from the previous week. The 30-year bond rose further to 5.159%, also marking a sharp weekly advance.
Moves were even more dramatic in parts of Asia and Europe. Japan’s 10-year yield climbed to its highest level since 1996 as policymakers weighed additional borrowing to support a potential emergency budget linked to the Iran conflict’s economic spillover. In Europe, Germany’s 10-year yield reached a 15-year high, underscoring how global rate expectations are being pulled upward by energy-driven inflation risks.
Equity markets weakened broadly as higher yields reduced the appeal of future corporate earnings and increased borrowing costs for companies.
Across Europe, shares slipped about 0.4%, with Paris leading losses as it fell roughly 0.9%, while Frankfurt and London managed modest gains. In the United States, futures for both the S&P 500 and Nasdaq fell around 0.5%, signalling a cautious start ahead.
In Asia, Japan’s Nikkei eased about 1% following a prior week of losses from record highs. South Korean stocks edged up 0.3%, supported by a near 4% jump in Samsung Electronics after a court partially blocked a union strike. Broader regional sentiment remained weak, with the MSCI Asia-Pacific index excluding Japan down 0.6% and Chinese blue chips slipping 0.5% following disappointing economic data.
Beyond geopolitics, markets are also focused on whether the artificial intelligence-driven equity rally can maintain momentum. Attention is centred on Nvidia, due to report earnings on Wednesday, with expectations extremely elevated given its dominance in AI chip demand.
Nvidia shares have already surged 36% since their March low, while the Philadelphia SE Semiconductor Index has climbed more than 60%, fuelled by massive capital spending on AI infrastructure across the tech sector.
Retail earnings will also be closely watched this week, including results from Walmart (WMT.O), as investors gauge how consumers are coping with higher energy costs and tighter financial conditions.
In foreign exchange markets, risk aversion supported the U.S. dollar, which tends to benefit during periods of global uncertainty due to its liquidity and America’s position as a net energy exporter.
The euro was steady at $1.1629 after falling 1.4% the previous week. The British pound edged slightly higher to $1.3354 but remained under pressure after a 2.3% weekly decline linked to domestic political instability and stress in the gilt market.
The dollar held firm at 158.94 yen, with traders closely watching the 160 level, which has previously triggered concerns about possible intervention by Japanese authorities.
Despite elevated geopolitical risk and inflation concerns, gold remained largely unchanged at around $4,538 an ounce, suggesting that safe-haven demand has been relatively muted so far compared with previous crisis episodes.
Meanwhile, finance ministers from the Group of Seven are meeting in Paris to discuss energy security and the stability of critical raw materials supply chains. However, diverging national interests are expected to test the group’s ability to present a unified response to the unfolding crisis.