Global Financial markets have endured months of turmoil, with overlapping concerns over the US debt downgrade, recession fears, and an intensifying global trade war. The sharp escalation in Middle East conflict last week has only deepened the anxiety, as Israel and Iran exchanged strikes, raising the specter of prolonged regional instability.
With the 90-day reciprocal tariff truce also nearing its expiration, the weeks ahead look increasingly fraught. For investors, the challenge is no longer just about navigating volatility, but about reassessing whether the overstretch rebound in US equities since April has run its course.
In the currency markets, the week’s performance map clearly reflected a risk-off tone. Swiss Franc stood out as the top performer, benefiting from its traditional safe haven appeal.
Euro also gained significantly, supported not only by its status as the most liquid and stable Dollar alternative, but also by growing sentiment that ECB is near the end of its easing cycle. While a recalibration cut might still be delivered later in the year, markets increasingly believe that the bulk of rate reductions is behind us.
Canadian Dollar rounded out the top three, supported not by domestic strength but by a sharp rally in oil prices amid fears of supply disruption in the Middle East.
On the flip side, Aussie was the week's worst performer, weighed by its sensitivity to global risk sentiment. Dollar fared little better, finishing second worst despite a bounce late in the week as traders tentatively reconsidered its geopolitical hedge appeal. Kiwi also landed among the bottom performers.
Sterling ended in the middle of the pack but underperformed its European peers, dragged down by weak UK jobs and GDP data that reinforced expectations for BoE rate cut in August (not the upcoming meeting.. Meanwhile, the Japanese Yen also finished mid-table, with markets becoming less convinced that BoJ will tighten policy again this year.
Middle East Escalation Overshadows Market Worries
The sharp escalation in the Middle East conflict has rapidly overtaken other key market concerns—including trade war, US fiscal uncertainty, and recession risks—and is now the dominant driver of global sentiment.
Israel’s largest-ever airstrike on Iranian ballistic missile infrastructure and senior military leaders, followed by Iran’s retaliatory attacks on Israeli cities, marks a dangerous turning point in the regional conflict. What was initially feared as a one-off strike now could quickly become the start of a drawn-out military campaign.
The geopolitical risk premium surged in tandem with crude oil prices, which on Friday posted their largest intraday gains since Russia’s invasion of Ukraine in 2022. Traders began pricing in the risks of serious supply disruptions. Markets are growing increasingly concerned that the conflict could evolve into a broader regional war, possibly threatening key energy infrastructure and shipping routes. The nuclear talks previously scheduled between the US and Iran in Oman now seem moot, with diplomacy giving way to open confrontation.
Oil markets are particularly sensitive to any disruption in Iranian supply. Iran currently produces around 3.3 million barrels per day and exports over 2 million bpd of crude and refined products. Any damage to...