Market focus shifts to Middle East geopolitics

Market focus shifts entirely to the geopolitical sphere as the United States and Israel have begun air strikes against Iran. US President Donald Trump confirmed the US was involved, saying it had begun “major combat” operations against Iran. The objective of these attacks clearly appears to be regime change and Iran has confirmed that Supreme Leader Ayatollah Khamenei was killed as was the head of the Revolutionary Guards and many other military leadership figures.

Iran has retaliated with drone and missile strikes hitting the UAE, Qatar, Bahrain, Kuwait, Saudi Arabia, Oman and Israel. Airspace over much of the region is closed, carriers have cancelled flights and many regional governments have instructed residents to shelter in place. Iranian forces have notified vessels that the Strait of Hormuz is “closed” though there has not been an official statement. Vessels about to enter the Strait have reportedly paused or have reversed course.

The economic consequences of this conflict will be substantial and will be a function of its scale and length. The most immediate channel will be felt through oil markets which will price in much more geopolitical risks. To alleviate some of the anxiety over supply, OPEC+ agreed over the weekend to increase production for April by a total of 206k b/d and further unwinding production restraint, as had been our base case for 2026. The UAE’s targeted output level for April was set at 3.43m b/d, nearly 500k b/d higher than the target for a year earlier, while Saudi Arabia’s output was set at 10.17m b/d, more than 1.1m b/d higher than April 2025.

Today’s Economic Data and Events

11:00 TR S&P Global / ICI Turkey manufacturing PMI Feb

11:00 TR GDP y/y Q4 2025: forecast 3.8%

14:30 IN industrial production y/y Jan: forecast 6%

19:00 US ISM manufacturing Feb: forecast 51.5

Fixed Income

US Treasury markets are pricing in an inflationary consequence of the conflict with yields on the 2yr UST up 3bps to 3.4056% and the 10yr higher by 4bps at 3.9792%. Headlines over data will be the primary market variable at present so market moves may be volatile.

Rates pricing for the end of 2026 is still set on slightly more than two 25bps cuts from the Fed with the first cut nearly fully priced in for July.

GCC markets ended last week on a positive footing but conditions prior to the start of the conflict will likely have little bearing on pricing this week.

FX

Currency markets are moving toward the US dollar but not in a particularly disorderly manner. The DXY index has opened higher by 0.2% with gains of that size coming from Euro (1.1791) and Japanese yen (156.32). GBPUSD is also weaker, down by 0.2% at 1.3451 while Swiss franc is receiving a haven bid and USDCHF trading at 0.7682, down 0.1%.

Emerging market currencies are showing wider moves with USDINR up by 0.3% at 91.24 and USDZAR at 16.0347, up 0.6%. Turkish lira and Egyptian pound are steady at 43.96 and 47.94 respectively.

Equities

Global equity markets ended last week on a down move and equity futures are extending that move into early trading today. S&P futures are lower by about 0.8% alongside a similar sized move for the NASDAQ while European equity futures are also in the red.

In cash trading, the Nikkei is lower by 1.4% while the Hang Seng is down 1.7%.

The Tadawul closed lower by 2.2% overnight, paring steeper losses at the start of the week. Equity markets in Egypt were lower by about 2.5% overnight.

Commodities

Oil markets have been the most visible expression of markets pricing in geopolitical conditions with Brent opening 12.5% higher at USD 81.57/b and touching as high as USD 82.37/b. Markets have since pared those moves as there is a renewed focus on diplomatic avenues but in the meantime, oil will be highly subject to headlines and in particular, the status of the Strait of Hormuz.

Time spreads have widened substantially with 1-2 month Brent now at a backwardation of USD 1.28/b.

Gold has received a haven bid in early trading, up 1.6% at USD 5,362/oz, pulling silver and the rest of the precious metals complex with it.