European stock indices cautiously bid

US stock index futures began the week by gapping lower. This followed the news that the US launched airstrikes on Iranian nuclear sites over the weekend. The initial reaction was swift and negative, with futures on the S&P 500 hitting lows last seen at the beginning of this month. But it didn’t take long before the dip buyers stormed in, taking all the US majors back into positive territory.

Source: TN Trader

The strikes targeted key facilities in Fordo, Isfahan, and Natanz, surprising many investors who had expected diplomatic talks to continue after President Trump indicated Friday that he would make a decision within two weeks.

Traders are considering the likely result of the US involvement. One potential outcome is that it risks a broader conflict, ultimately involving Iran’s major allies, Russia and China. Another is that this decisive action helps to stabilise the Middle East by seriously disrupting Iran’s military nuclear programme.

Asian Pacific stock indices had a mixed start to the week as investors digested the dramatic events across the Middle East. Both Hong Kong’s Hang Seng and the Shanghai Composite ended the session up 0.7%. But Australia’s ASX 200 and the Japanese Nikkei closed down 0.4% and 0.1% respectively.

The divergent performance suggests that investors are responding cautiously but not uniformly, with some viewing the US strikes as a contained event rather than the start of a larger regional conflict.

Market participants across Asia remain alert to any further developments that could disrupt sentiment, but there was no wholesale flight from risk assets during Monday’s session.

Across FX, the US dollar continued to recover its mojo following a particularly bad run of late. Less than a fortnight ago, the Dollar Index hit its lowest level since February 2022 as it pulled back towards 97.00. 

This morning, it was closing in on 99.00, trading at its best level since the beginning of this month. Finally, the dollar is back in demand as a safe haven amid geopolitical concerns. 

Not so the Japanese yen, which was lower across the board. The move out of the yen saw the USDJPY close in on 148.00, to trade at its highest level since mid-May.

Source: TN Trader

Gold initially jumped higher following news of the US airstrikes. It gapped up $12 from Friday’s close to trade near $3,390. But those gains have since evaporated. Gold dropped back sharply soon after the European open, before buyers crept back in. 

Gold’s inability to hold early strength could reflect the market’s reassessment of the likelihood of further escalation or may simply be profit-taking in a well-supported market.

Source: TN Trader

Silver was little-changed when it reopened on Sunday night, trading on either side of $36 per ounce. It proceeded to grind higher early in the European session and continues to consolidate, following a volatile few weeks.

Source: TN Trader

Oil prices jumped as much as 4% in early trading on concerns that the US strikes on Iran could lead to supply disruptions, particularly if Iran follows through on threats to block the Strait of Hormuz. Front-month WTI traded up to $77.70, hitting its highest level since mid-January.

Source: TN Trader

However, much of that spike has since faded, with crude now effectively unchanged from Friday’s close.  Markets appear to be cautiously optimistic that diplomatic efforts, including calls from the US for China to prevent Iran from escalating, may help avoid a full-blown energy crisis. Still, the risk premium is clearly back in the oil market.

Natural gas markets were relatively quiet, with prices drifting slightly lower and trading just below the 4 BTU mark. Despite the heightened geopolitical tensions, gas has yet to show a decisive move, suggesting traders are looking for more direction either from weather patterns, storage data, or any significant disruption in supply lines before making bolder plays.

Cryptocurrencies began the session under pressure following weekend headlines, but have since mounted a strong recovery. Bitcoin rebounded after breaking below the $100,000 level.

Ether has followed suit, also bouncing back. But it broke below $2,400 over the weekend, doing some technical damage chart-wise.

The VIX, Wall Street’s fear gauge, surged higher overnight in response to the US airstrikes but has since cooled off. The upside move was relatively muted compared to the importance of the weekend news.

The VIX suggests that investors are cautious but not panicked, perhaps reflecting confidence that the conflict won’t spiral further in the immediate term.

On the economic calendar, global PMI data will be in focus, with the US numbers out later today. These offer a snapshot of growth trends amid geopolitical turbulence. 

Several Fed officials are also scheduled to speak, and their tone will be closely analysed for clues about how the central bank views recent inflation and global developments. 

No significant corporate earnings are due today, keeping the spotlight squarely on macro and geopolitical factors.

For now, markets appear to be taking the weekend’s dramatic developments in stride. Oil’s muted follow-through, gold’s reversal, and the VIX’s modest rise all suggest that traders believe escalation will be limited and that the US has put a significant dent in Iran’s nuclear ambitions. 

The alternative is that they’re underestimating the potential fallout. The situation remains fluid, with both military and diplomatic developments still unfolding. For now, the bulls are wounded - but not shaken. Whether that remains the case depends on what comes next.