Global markets kicked off the week in a state of uneasy calm, as traders weighed the risk of escalating geopolitical tensions in the Middle East against a packed macro calendar led by central bank decisions and the upcoming G7 summit.
Brent crude spiked as much as 5.5% in early Asia trade Monday following a weekend of intensifying military exchanges between Israel and Iran. However, gains quickly faded, with the benchmark trading up less than 1% by mid-day as investors reassessed the likelihood of broader regional disruption. The initial surge in oil underscored the fragility of risk sentiment amid uncertainty over whether the conflict will remain localized or evolve into a deeper geopolitical crisis with global ramifications.
Israeli Prime Minister Benjamin Netanyahuâs vow to retaliate forcefully âat every site and every targetâ linked to the Ayatollah regime has kept energy markets on edge. The specter of oil supply disruptions at a time when inflation remains sticky and global growth shows signs of deceleration has reignited hedging demand across commodities, particularly in crude and gold.
Gold prices hovered near record highs, bolstered by both geopolitical hedging flows and a weaker dollar backdrop. The greenback was little changed overall, reflecting investor hesitation ahead of key risk events this week, including the Federal Reserve and Bank of Japan rate decisions. With central banks balancing disinflation progress against fragile growth dynamics, any resurgence in oil-driven inflation could complicate the policy path further particularly for the Fed, which enters the decision week amid growing calls for caution.
What Traders Need to Know:
- Oil Market Sensitivity:Â While the crude price rally moderated, volatility remains elevated. Any signs of supply disruption from the Strait of Hormuz or broader OPEC region could reignite inflation risks and unsettle bond markets.
- Safe-Haven Flows:Â Goldâs upward momentum continues to gain traction amid geopolitical uncertainty and real yields remaining subdued. With central bank gold accumulation at record highs, structural support for the metal remains firmly in place.
- Central Bank Watch:Â Markets await updated guidance from the Fed and BoJ. The Fed is widely expected to hold steady but may strike a more cautious tone in light of rising geopolitical risks. Meanwhile, the BoJ is unlikely to surprise but any signal on the timing of balance sheet adjustments could trigger yen repositioning.
- G7 Volatility Risk:Â The upcoming Group of Seven meeting could surface additional flashpoints from global trade disputes to coordinated responses to the Middle East crisis adding a layer of political uncertainty to already fragile markets.
With markets not yet fully pricing in a broader conflict scenario, investors may be underestimating the tail risk. Traders should consider building defensive positions in energy-related assets and precious metals while remaining nimble around FX and equity exposures. Any escalation from here could spark a more aggressive reallocation out of risk and into safe havens.
The restrained market reaction so far reflects a belief that the Israel-Iran conflict will remain contained. But with geopolitical risks rising just as the worldâs major central banks prepare to update their policy guidance, traders should brace for a bumpy ride. Staying informed and positioned for volatility is no longer optional itâs essential.