Geopolitics fuel risk-off mood while central banks send mixed monetary signals

Markets are grappling with a wave of risk aversion as geopolitical tension in the Middle East intensifies and global monetary policy paths diverge. While equity benchmarks slipped and haven assets gained modest ground, central bank surprises and energy market reactions are adding complexity to the market narrative. Here’s a comprehensive breakdown of the latest developments:

Middle East escalation keeps global markets on edge

Markets opened defensively after the weekend brought a significant escalation between Israel and Iran. The conflict, already drawing in diplomatic responses, could soon broaden further.

• US officials are preparing for a potential strike on Iran in the coming days, with contingency planning already underway across federal agencies. This follows an Iranian missile strike on Soroka Medical Center in Israel and Israeli retaliation on strategic military and nuclear-linked sites in Arak.
• President Trump has signaled readiness to escalate but has yet to commit, stating he may “make the final decision one second before it’s due.”
• Israel vows continued escalation, directly blaming Iran’s Supreme Leader. So far, Iran has launched 400 ballistic missiles and hundreds of drones, while Israel has expanded strikes to dozens of Iranian targets.
• Global concern is rising about maritime route safety, particularly the Strait of Hormuz, a vital artery for global oil flows.

Oil markets: Supply risk priced in, gains moderate

Despite the escalating conflict, oil markets showed a surprisingly muted reaction:

• Brent crude rose 1.1% to settle at $73.72, having jumped over 5% in early Asian trading.
• WTI crude also moved higher amid speculation of supply disruptions but closed well off intraday highs.
• Futures curves steepened, indicating the market’s expectation for continued volatility and tightness in supply.

Safe-haven demand: Gold steady, dollar mixed

With heightened geopolitical risk, safe-haven flows returned:

• Gold held its ground near recent highs, as central banks and investors alike sought refuge.
• The Bloomberg Dollar Spot Index advanced by 0.2%, reflecting moderate demand for USD liquidity.
• Meanwhile, the Israeli shekel remained under severe pressure, having dropped sharply following the first Iranian missile wave.

Equities under pressure amid risk aversion

Global equity markets largely retreated, reflecting investor unease:

• US equities reversed earlier gains, with the S&P 500 slipping from session highs.
• European indices followed suit, led by declines in defensive sectors like financials and utilities.
• In Asia, the Nikkei 225 remained buoyant (+1.1%) thanks to a weaker yen and gains in defense stocks, while the Hang Seng and Shanghai Composite closed little changed.
• Defensive themes dominated as investors rotated into gold, energy, and bonds.

Central bank divergence: SNB surprises with rate cut to 0%

The Swiss National Bank (SNB) unexpectedly cut its benchmark rate by 25bps to 0.00%, marking its sixth straight cut in a year:

• The move was aimed at discouraging capital inflows and weakening the franc, which has appreciated significantly this year.
• SNB hinted at further easing if required, even venturing into negative rates again, despite known side effects for the banking sector.
• The Swiss franc gained 0.2% after the announcement as markets initially priced in a more aggressive 50bps cut.
• Swiss equities dropped as much as 1.1%, with banks particularly hit by flat yield curves and falling margins.

Bond yields rise globally as inflation jitters persist

Even amid geopolitical tension, bond yields edged higher:

• The US 10-year Treasury yield rose 5bps to 43%, driven by inflation uncertainty and a cautious Fed.
• Australian 10-year yields surged 8bps, marking the biggest daily rise since April.
• The bond selloff reflects a broader reassessment of the path of monetary policy, especially if energy prices remain elevated.

Cryptocurrency rebounds cautiously

After several sessions of declines, cryptocurrencies rebounded modestly:

• Bitcoin rose 1.1% to $105,936, breaking a five-day losing streak.
• Ethereum advanced 2.6% to $2,569, benefitting from renewed interest in risk-alternative assets.
• Digital assets remain volatile but appear to be decoupling slightly from broader risk trends as investors test the water.

Defensive positioning still warranted

The mix of escalating geopolitical tensions, diverging central bank paths, and energy-driven inflation risk is producing a highly nuanced investment environment. While risk assets like equities are showing pockets of resilience, the dominant tone remains cautious. A diversified approach emphasizing gold, energy, select defensives, and currency hedging is recommended for navigating the days ahead.

Volatility is likely to remain elevated, with headline sensitivity at extremes. Traders and investors alike should prepare for rapid shifts in sentiment as both policy and geopolitical developments unfold in real time.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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