Investor attention remained firmly anchored on developments in the Middle East last week, with escalating tensions in the Gulf continuing to dictate market sentiment across global assets. The sharp surge in oil prices and the corresponding rise in inflation expectations introduced a renewed layer of uncertainty, weighing on risk appetite and placing persistent upward pressure on sovereign bond yields. This shift fed directly into interest‑rate expectations, with traders meaningfully scaling back the probability of near‑term easing from the Federal Reserve, despite repeated calls from the White House for earlier policy action. A similar reassessment unfolded across Europe, where both the Bank of England and the European Central Bank are now expected to adopt a more cautious stance, reflecting the growing risk that higher energy costs combined with already fragile growth conditions, could reawaken stagflation concerns.

The resulting caution was evident across global equity markets. Most major indices ended the week in negative territory, with US equities posting a third consecutive weekly decline. The S&P 500 and NASDAQ fell -1.6% and -1.3% respectively (both in dollar terms), whilst US Treasuries recorded losses across much of the curve as yields adjusted to the shifting policy narrative. European equities also struggled, the MSCI Europe ex‑UK declining by -0.6% (in euros), with France the notable laggard among the larger economies on the Continent.

In the UK, the FTSE 100 delivered a more muted pullback of -0.2%, supported by renewed strength across its sizeable oil and defence sectors, which helped to offset weakness elsewhere. Asian markets were also weak with Japan’s Nikkei 225 falling -3.2% (in yen), reflecting mounting anxiety around the inflationary consequences of higher crude prices for an economy heavily dependent on Middle Eastern imports. Meanwhile, the Shanghai Composite declined 0.7% (in renminbi terms), capping a mixed week for mainland equities.

Moving to commodities, oil prices continued to strengthen last week with Brent Crude jumping by nearly +11.0% to $103 a barrel to extend its three month gain to +68.0%. In contrast, gold eased by -2.2% to $5,031 an ounce despite the broader risk-off tone currently being seen across markets.

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