Global financial markets reeled on Friday as escalating conflict in the Middle East sent oil prices surging past $100 a barrel, triggering a flight to safety that bolstered the US dollar and sank stock indices.
Energy Markets in Turmoil
The immediate catalyst was the ongoing US-Israeli conflict with Iran, which has vowed to close the critical Strait of Hormuz shipping lane. Despite a US partial waiver on Russian oil sanctions aimed at easing supply, Brent crude futures settled at $103.14 per barrel, marking a 2.67% gain and crossing the $100 threshold for the first time since August 2022. West Texas Intermediate (WTI) crude also rose over 3% to $98.71.
Analysts warn the disruption could be prolonged, with some speculating about the risk of prices reaching as high as $200 per barrel if the conflict intensifies. “Headlines are coming at the market like water from a fire hose, which is impacting the price of oil, and consequently, financial markets,” said Mitch Reznick of Federated Hermes.
Equities Slide, Dollar Strengthens
The oil shock sent ripples through equity markets. All three major US indices—the Dow Jones, S&P 500, and Nasdaq Composite—closed lower for the day and the week. European shares followed suit, with the pan-European STOXX 600 falling 0.5%.
Investors flocked to the perceived safety of the US dollar, which strengthened for a second consecutive week, gaining 0.8% against a basket of currencies. This put pressure on other major currencies; the euro fell 0.8%, while the Japanese yen hit its weakest level since mid-2024, prompting warnings of potential intervention from Tokyo.
Central Bank Expectations Rewritten
The specter of rising energy costs fueling inflation has forced a rapid recalibration of interest rate expectations. Traders have sharply reduced bets on Federal Reserve rate cuts this year, now pricing in just 20 basis points of easing compared to 50 basis points anticipated last month.
This shift was reflected in bond markets, where two-year US Treasury yields—sensitive to Fed policy—hit a six-month high on Thursday before easing slightly on Friday. “Despite signs of economic softening, more sticky inflation data simply strengthens the idea that the Fed will remain on the sidelines,” noted Ellen Zentner of Morgan Stanley Wealth Management.
Broader Economic Data Overshadowed
Key economic data releases were largely overshadowed by the geopolitical focus. The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, rose 0.3% in January, matching estimates. Separate data showed US economic growth slowed more than initially thought in the fourth quarter.
Investor attention now turns to a packed schedule of central bank meetings next week, including the Fed, the European Central Bank, and the Bank of Japan, with most expected to hold rates steady amid the heightened uncertainty.
In other markets, gold prices fell over 1% for the week, settling at $5,014 per ounce, as the stronger dollar diminished its appeal.
