Global markets fell sharply on Monday as escalating conflict in the Gulf and Iran’s claim that it had closed the Strait of Hormuz fueled a surge in oil prices, reviving concerns over inflation and the outlook for interest rates.
Asian equities led the decline while investors shifted toward the U.S. dollar and government bonds amid growing geopolitical uncertainty. The renewed tensions also cast a shadow over the upcoming corporate earnings season, where expectations for technology and artificial intelligence companies remain exceptionally high.
Oil rally rattles markets
Brent crude rose 4.3% to $79.31 a barrel, recovering significantly from its recent low of just above $70, while U.S. West Texas Intermediate crude climbed 4.4% to $74.62.
The gains followed reports of intensified military activity in the Gulf and Iran’s assertion that it had shut the Strait of Hormuz after recent attacks on commercial shipping.
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Although U.S. officials said about 20 vessels had been escorted safely through the waterway over the previous 24 hours, ship tracking data indicated that commercial traffic remained unusually light.
The Strait of Hormuz is one of the world’s most important energy corridors, handling roughly one fifth of global oil trade, making any disruption a major concern for financial markets.
Asian stocks lead global selloff
Japan’s Nikkei fell 2.2%, extending losses from the previous week, while the MSCI Asia Pacific index outside Japan dropped 1.8%.
South Korea’s KOSPI suffered the steepest decline, tumbling 7.6% after losing nearly 8% the previous week as investors continued reducing exposure to semiconductor stocks following months of strong gains.
U.S. equity futures also pointed lower.
S&P 500 futures fell 0.6%, while Nasdaq futures lost 1.3%. European markets were also set for weaker openings, with futures for the Euro STOXX 50, Germany’s DAX and Britain’s FTSE all trading lower.
AI optimism faces first major test
Investors are preparing for a crucial earnings season that could determine whether the technology driven rally can continue.
Major U.S. banks begin reporting results this week, while Netflix, General Electric and Taiwan Semiconductor Manufacturing Company are among the companies due to release earnings over the coming days.
Citi analysts maintained a positive outlook on the technology sector, arguing that strong earnings momentum and attractive valuations continue to support artificial intelligence investments despite recent volatility.
However, Bank of America warned that enormous spending by hyperscale technology companies on AI infrastructure is reducing free cash flow and raising questions about long term sustainability.
The bank estimated major technology firms have already spent about $234 billion on AI related capital expenditure this year.
Dollar strengthens as rate expectations shift
Higher oil prices pushed U.S. Treasury yields higher as investors reduced expectations that the Federal Reserve would ease monetary policy.
Two year Treasury yields climbed to their highest level since early 2025, while futures markets priced in roughly 39 basis points of additional tightening by year end.
The U.S. dollar index remained firm at 101.13.
The euro edged lower against the dollar as Europe remains more dependent on imported energy than the United States, making the region more vulnerable to sustained increases in oil prices.
The Japanese yen weakened slightly after recent gains driven by comments from Japan’s finance minister about encouraging domestic pension funds to increase investments at home.
Sterling also slipped ahead of a significant week in British politics as Labour prepares to appoint Andy Burnham as party leader before he is expected to become prime minister later this month.
Gold retreats despite geopolitical tensions
Despite heightened geopolitical uncertainty, gold prices fell about 1.5% to around $4,060 per ounce as rising Treasury yields reduced the appeal of non interest bearing assets.
Higher bond yields often offset demand for traditional safe haven investments, even during periods of international instability.
Analysis
Markets are increasingly balancing two competing narratives. On one hand, strong corporate earnings and continued investment in artificial intelligence remain powerful drivers for global equities. On the other, renewed conflict in the Gulf threatens to push energy prices higher, potentially reigniting inflation just as major central banks were preparing to ease policy.
The Strait of Hormuz remains the key variable. If shipping disruptions remain limited, markets may quickly refocus on earnings and economic data. However, any sustained interruption to oil flows could trigger another inflation shock, forcing central banks to maintain tighter monetary policy for longer and putting additional pressure on richly valued technology stocks that have led global markets over the past year.
With information from Reuters.
