European markets under pressure

US stock index futures tumbled overnight after news broke that Israel had launched a targeted military operation against Iranian nuclear facilities. All the US majors were down well over 1% soon after the European open, although they had bounced off the lows hit in the early hours of the Asian Pacific session.

Source: TN Trader

The strike followed mounting tensions throughout the week and was executed with the US reportedly informed in advance - though notably, the US did not participate. In the aftermath, Israel’s Defence Minister, Israel Katz, declared a special state of emergency, sending markets into immediate risk-off mode. 

The sharp drop in stock index futures, along with sharp rallies in safe havens such as gold, the US dollar, Japanese yen and Swiss franc, highlights just how fragile sentiment remains in the face of major geopolitical flare-ups.

Asian Pacific stock indices ended Friday’s session deep in the red as investors digested the implications of Israel’s overnight military strike on Iran. With fears of an Iranian retaliation looming, risk appetite quickly evaporated.

Japan’s Nikkei 225 fell 0.9%, Hong Kong’s Hang Seng dropped 0.6%, and the Shanghai Composite lost 0.8%. Australia’s ASX 200 dipped 0.2%, faring marginally better but still reflecting the nervous tone that swept through regional markets.

In FX, the US dollar outperformed, making gains across the board in a reminder that it remains the world’s reserve currency. This gives it a depth and liquidity, which means it is the go-to currency, even outpacing the Japanese yen and Swiss franc, both of which were also in demand.

Source: TN Trader

The yen and Swiss franc, often viewed as havens in times of geopolitical stress, made gains against everything except the US dollar. The dollar's strength reflected both a flight to safety and an unwind of earlier risk-on positioning.

Oil prices surged in reaction to the overnight strike. Both Brent and West Texas Intermediate (WTI) were up 7% at the time of writing, having spiked 11% higher overnight.

Source: TN Trader

The sharp rally reflects growing fears that any Iranian retaliation, or broader regional fallout, could disrupt supply lines. Iran remains a key OPEC+ producer, and with tensions now escalating rapidly, traders wasted no time bidding up crude. For now, the oil bulls clearly have the momentum.

Gold prices also surged as investors fled into traditional safe-haven assets. Gold moved sharply higher in early Asian Pacific trade, in a clear reaction to rising geopolitical risk and equity market uncertainty.

Source: TN Trader

The move continues a trend seen throughout recent periods of volatility, with investors turning swiftly to gold whenever risk sentiment heats up. In this environment, gold’s role as a portfolio hedge has once again been reaffirmed.

The Volatility Index (VIX) spiked 10% to trade north of 20 as volatility returned to markets. The sudden shift overnight jolted traders back into risk management mode after the VIX spent much of the past fortnight drifting sideways in a narrow range.

Source: TN Trader

The VIX surge reflects more than just a jump in short-term risk. It also signals that investors expect choppier waters ahead. With uncertainty growing around both geopolitics and global markets, investors are ready to pay up and add to hedges until there is evidence of a cooling in tensions.

Outside of the geopolitical story, other global headlines added to investor concerns. An Indian Boeing Dreamliner crashed en route to London, killing all but one on board. The incident marked the first fatal crash for that model and pushed Boeing’s stock down over 7%, although it later staged a partial recovery.

On the economic front, US consumer sentiment data is due later on Friday. While ordinarily a key gauge for markets, the report may take a back seat to geopolitical headlines. Looking ahead, attention will shift to the Fed next week. 

Investors effectively assign a zero probability to any change in interest rates following the Fed’s two-day meeting, which concludes on Wednesday.

Recent bullish momentum was abruptly halted overnight as Israel’s strike on Iran sent shockwaves through global markets. Oil and gold rallied sharply, stock market volatility jumped, and stock index futures were slammed.

The big question now is Iran’s response. With both sides entrenched and rhetoric escalating, investors are bracing for more instability. As it stands, risk appetite has been replaced by caution. For now, the path forward looks anything but smooth.