Fears that Middle East conflicts could trigger a sharp economic slowdown have led traders to reduce bets on higher interest rates. On Monday, Brent crude oil briefly surpassed $115 per barrel. U.S. Treasuries strengthened, providing support to U.S. equities.
As of the latest update, Dow Jones futures advanced 0.66%, S&P 500 futures gained 0.64%, and Nasdaq futures rose 0.64%.
In Europe, the Stoxx 600 index climbed 0.5%. Utility and energy stocks supported the blue-chip index amid rising oil prices. Banking shares across Europe faced pressure as escalating Middle East tensions weighed on growth prospects. Germany's DAX index, which has a heavy weighting in industrial stocks, dipped 0.2%, while France's CAC 40 remained flat. Gains in aluminum and oil prices lifted basic materials and energy companies, helping the UK's FTSE 100 index rise 0.1%.
Since the outbreak of hostilities, both the Nasdaq and the small-cap Russell 2000 index have entered correction territory. The benchmark S&P 500 is now less than 1.5% away from also falling into a correction. U.S. markets will be closed this Friday in observance of Good Friday.
Wall Street firm Morgan Stanley downgraded its global equity rating from "overweight" to "neutral allocation." However, the bank noted that since the conflict began, inflows into U.S. stocks and bond markets have exceeded those into other global regions, suggesting that U.S. markets may once again be seen as a safe haven for investors.
Most Asian markets declined on Monday. South Korea's Kospi index led the losses, closing down 3.0%, dragged lower by chip and automotive stocks. Japan's Nikkei index fell 2.8%, while Hong Kong's Hang Seng index dropped 0.9%.
Oil prices surged, with Brent crude rising 2.6% to $115.45 per barrel, bringing its monthly gain to nearly 60%. WTI crude increased 1.3% to $100.98 per barrel. Market observers noted that there are few signs of de-escalation in the conflict, with attention shifting to vulnerabilities in alternative oil export routes.
Macquarie Group warned that if the conflict persists into June and the Strait of Hormuz remains closed, oil prices could reach a record $200 per barrel. Analysts, including Vikas Dwivedi, indicated in a report that there is a 40% probability of oil prices remaining at historically high levels if the conflict continues through the second quarter.
They also suggested a 60% likelihood that the conflict could conclude by the end of the month.
Guillermo Hernandez Sampere, Head of Trading at asset manager MPPM, commented, "Market sentiment has deteriorated as the potential negative impacts can no longer be ignored. There is no sign of a swift end to the conflict; securing supply chains must be based on solid agreements."
Bloomberg macro strategist Adam Linton noted, "Today's price action resembles patterns seen repeatedly during this conflict: equities start the week strong—the S&P 500 has closed higher every Monday since February 28—but often weaken later. Unless there is a substantive breakthrough, this week appears unlikely to be an exception."
Recent market movements followed missile attacks over the weekend, with Iran and its proxy forces targeting U.S. allies. Concerns over escalation intensified as a U.S. amphibious strike group arrived in the region and Iran-backed Houthi forces became involved. The conflict has now lasted one month.
However, investors found some reassurance after former President Trump stated that the U.S. and Iran have been in "direct and indirect" contact, while Pakistan, acting as an intermediary, suggested it might host "meaningful talks" in the coming days.
Although traders have so far focused on the inflationary impact of rising oil prices, driving the U.S. Treasury market toward its largest monthly decline since October 2024, some of Wall Street's largest bond managers indicated that bond yields may decline as the war's impact on economic growth becomes more apparent.
Francisco Simón, European Strategy Head at Santander Asset Management, said, "While inflation remains a concern, potential drags on growth and confidence should begin to act as a hedge, limiting further increases in yields. Beyond oil prices, we view the bond market as one of the clearest indicators of how the conflict is being priced into the macro outlook."
U.S. Treasury yields fell across the board. According to Tradeweb, the two-year yield declined 3.9 basis points to 3.875%, while the 10-year yield dropped 5.2 basis points to 4.387%.
Based on the CME FedWatch Tool, money market participants no longer expect the Federal Reserve to cut interest rates this year, whereas before the conflict, two rate cuts had been anticipated.
European bond markets also strengthened, though yield declines were less pronounced than in the U.S. Germany's 10-year yield fell 2.2 basis points to 3.083%, while Italy's 10-year yield decreased 3.7 basis points to 4.035%. Money markets now price in a roughly 60% chance of a European Central Bank rate hike next month, compared to nearly full expectations a week ago.
The U.S. dollar edged lower after hitting a two-week high overnight, as safe-haven demand had previously boosted the currency. The dollar's retreat reflected strength in the Japanese yen.
The yen strengthened against all G10 currencies after Japan's top currency official, Atsushi Mimura, indicated that Japan may take decisive action in the foreign exchange market. Aluminum prices rose 4% following Iranian attacks on Middle Eastern smelters over the weekend. Gold stabilized after posting its first weekly gain since the conflict began.
According to LSEG data, Bitcoin increased 1.2% to $67,347, after falling to a one-month low of $64,991 overnight.
In commodities, three-month aluminum on the London Metal Exchange surged 5.4% to $3,461 per ton, bringing its monthly gain to over 10%. Analysts at ANZ noted, "Approximately 4 to 5 million tons of exports from the region remain at risk, with no alternative supply currently available to fill the gap."
Alba, one of the world's largest aluminum producers, confirmed that its facilities were targeted in the Iranian attacks and is assessing the damage. Emirates Global Aluminium reported significant damage to its Al Taweelah production plant in Abu Dhabi following Iranian drone and missile strikes.
Gold prices edged higher in early trading but gains were limited as rising energy prices continued to fuel concerns about inflation and central bank tightening. Spot gold rose 0.8% to around $4,530. However, the metal remains down more than 13% for the month, pressured by a stronger dollar and higher oil prices.
ANZ analysts added, "After one of its largest sell-offs in recent years, gold rebounded late last week as bargain hunters stepped in. The metal has fallen more than 15% this month, influenced by ETF liquidations."
A series of labor market data releases are scheduled this week, including the March nonfarm payrolls report, which may offer further insight into the health of the U.S. economy. Markets will also parse remarks from Federal Reserve Chair Jerome Powell and New York Fed President John Williams later in the day.
U.S. consumer confidence has plummeted, raising questions about whether the March jobs report can hold up.
The U.S. March nonfarm payrolls report, due Friday from the Bureau of Labor Statistics, will be the highlight of a busy economic calendar.
A key question for investors is whether job growth will normalize after volatile readings of 130,000 jobs added in January and a loss of 92,000 jobs in February.
Additional data this week includes the Conference Board's report on market sentiment and expectations on Tuesday, the JOLTS job openings report also on Tuesday, and further labor market analysis from Challenger, Gray & Christmas on Thursday. On the corporate side, Nike is set to report quarterly earnings on Tuesday.
Morgan Stanley strategists suggested that despite ongoing military conflicts involving the U.S., Israel, and Iran, increasing evidence indicates that the U.S. stock decline is "approaching its final stages." They cited previous instances of "growth scares" that did not lead to recession or rate hikes.
The strategists noted that more than half of the Russell 3000 index components have fallen more than 20% from their 52-week highs, and the S&P 500 forward P/E ratio has dropped over 15%, indicating that market pricing increasingly reflects risks from the Middle East conflict.
"We believe equity complacency toward growth risks is lower than widely perceived," the strategists stated. However, they also warned that interest rate hikes remain a near-term risk for U.S. stocks.
In recent years, stock sensitivity to interest rate changes has approached historical highs. At the same time, the U.S. 10-year Treasury yield is nearing 4.5%, a level that has historically pressured equity valuations.
**Notable Movers** Aluminum stocks surged in pre-market trading: Century Aluminum gained 8.4%, Alcoa rose 7.7%, and Kaiser Aluminum advanced 1.7%. Attacks on major Middle Eastern aluminum producers pushed prices toward $3,500 per ton.
TotalEnergies shares increased 2.3% pre-market following reports that the company has reaped significant profits from its bets on Middle Eastern oil.
Rio Tinto climbed over 3% pre-market after resuming operations at three terminals in the Pilbara region.
iQiyi Inc. rose 12.4% pre-market as the company plans a secondary listing in Hong Kong and a $1 billion share repurchase.
NIO Inc. advanced 3.2% pre-market after opening its first store in Costa Rica, marking the official start of its expansion into Latin American markets.
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