(Agencies): Global stock markets plunged on Friday while oil prices soared to near multi-month highs after Israel launched a military strike on Iran, triggering Iranian retaliation and fueling a flight to safe-haven assets like gold, the U.S. dollar and the Swiss franc.
The escalation in the Middle East – a major oil-producing region – adds uncertainty to financial markets at a time of heightened pressure on the global economy from U.S. President Donald Trump’s aggressive and erratic trade policies.
Market reaction, which had abated in early European trade, gathered a renewed momentum as the session wore on.
Brent crude oil prices were last up almost 9% at $75.54 per barrel, having jumped as much as 14% during Asian hours. They were set for their biggest one-day jump since 2022, when energy costs spiked after Russia’s invasion of Ukraine.
U.S. oil futures rose almost $6 to $73.91.
Israel claimed it had targeted Iran’s nuclear facilities, ballistic missile factories and military commanders on Friday at the start of what it warned would be a prolonged operation to prevent Tehran from building an atomic weapon, while Iran has promised a harsh response.
Iran had launched about 100 drones toward Israeli territory in retaliation. Washington said it was not involved in the Israeli offensive.
World leaders urged restraint, while Trump urged Iran to make a deal over its nuclear program, saying that there was still time for the country to prevent further conflict with Israel.
Eyes on oil flow
The National Iranian Oil Refining and Distribution Company said oil refining and storage facilities had not been damaged and continued to operate.
The primary concern was whether the latest developments would affect the Strait of Hormuz, said SEB analyst Ole Hvalbye. The key waterway had been at risk of impact from increased regional volatility previously but had not been affected so far, Hvalbye said.
There also was no impact on oil flow in the region so far, he added.
About a fifth of the world’s total oil consumption passes through the strait, or some 18 million to 19 million barrels per day (bpd) of oil, condensate and fuel.
Analysts at consultancy Sparta Commodities said that any significant crude supply disruptions would lead to sour crude grades being marginally priced out of refineries in favor of light sweets.
Under a worst-case scenario, JPMorgan analysts said on Thursday that closing the strait or a retaliatory response from major oil-producing countries in the region could lead to oil prices surging to $120-$130 a barrel, nearly double their current base case forecast.
“The key question now is whether this oil rally will last longer than the weekend or a week – our signal is that there is a lower probability of a full-blown war, and the oil price rally will likely encounter resistance,” said Janiv Shah, analyst at Rystad.
“Fundamentals show nearly all Iranian exports going to China, so Chinese discounted purchases would be most at risk here. OPEC spare capacity can provide the stabilizing force,” he added.
An increase in oil prices would also dampen the outlook for the German economy, the economic institute DIW Berlin said on Friday. It is the only G-7 nation that has recorded no economic growth for two consecutive years.
“The increased uncertainty speaks in favour of a higher risk premium on the oil price, which is why it is unlikely to fall below $70 on a sustained basis for the time being … Fundamental data is taking a back seat in the current situation,” analysts at Commerzbank said in a note.
Safe-haven rush
In other markets, stocks dived and there was a rush to safe havens such as gold and the Swiss franc.
Gold, a classic safe haven at times of global uncertainty, rose 1% to $3,416 per ounce, bringing it close to the record high of $3,500.05 from April.
The rush to safety was matched by a dash out of risk assets. U.S. stock futures fell over 1%, European shares dropped almost 1% and in Asia, major bourses in Japan, South Korea and Hong Kong fell over 1% each.
“Clearly the big question is how far does this go?,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London, referring to the Middle East tension.
“The market has got it right in terms of stocks down, oil and gold up.”
The developments mean another major geopolitical tail risk has now become a reality at a time when investors are wrestling with major shifts in U.S. economic and trade policies.
“The geopolitical escalation adds another layer of uncertainty to already fragile sentiment,” said Charu Chanana, chief investment strategist at Saxo, adding that crude oil and safe-haven assets will remain on an upward trajectory if tensions continue to intensify.
The Israeli shekel fell almost 1.7% and long-dated dollar bonds for Israel, Egypt and Pakistan slipped.
Two-way pull for bonds
U.S. Treasuries initially benefited from the rush for safer assets, but as the day wore on focus turn to the inflationary impact of oil.
U.S. 10-year Treasury yields were last up 2.6 basis points (bps) at 4.38%, having touched a one-month low of 4.31%. Bond yields move inversely to prices.
“This is a flight-to-safety event. But markets are struggling a bit and in the fixed income space you have an oil-price shock that is inflationary and so you should see markets expecting an even more hawkish Fed,” said James Rossiter, head of global macro strategy at TD Securities.
“On the other hand, you have the flight-to-safety, which should push bond yields lower.”
Germany’s 10-year bond yield touched its lowest level since early March at around 2.42%, before also moving higher.
Daiwa’s Scicluna said a further push higher in oil prices could dampen expectations for central bank rate cuts.
“The ultimate response in bond markets to geopolitics is going to depend on how sharp the rise in energy prices is going to be,” he said.
Some traders were attracted to the dollar as a haven, with the dollar index up 0.8% to 98.50, retracing most of Thursday’s sizable decline.
The Swiss franc briefly touched its strongest level against the dollar since April 21, before trading 0.5% lower at around 0.8144 per dollar.
Fellow safe haven the Japanese yen fell 0.6% to 144.33 per dollar, giving up earlier gains of 0.3%.
The euro was down 0.8% at $1.15, after rising on Thursday to the highest since October 2021.
“Traders are now on edge over the prospects of a full-blown Middle East conflict,” said Matt Simpson, a senior market analyst at City Index.
“That will keep uncertainty high and volatility elevated.”
