Over the weekend, peace negotiations between the United States and Iran ended without agreement, prompting a risk-off sentiment across global equity markets and a surge in Brent crude prices above $100 per barrel on Monday morning [1][2][3]. Danske Bank expects equity markets to open more than 1% lower, tracking losses in Asia and anticipating a catch-down effect in European indices after their relative outperformance on Friday [1]. Asian equity indexes reflected the negative sentiment, with Japan’s Nikkei 225 down 0.8%, South Korea’s KOSPI Index down 0.85%, and Hong Kong’s Hang Seng Index dropping 1.16%, while the Shanghai Composite traded flat [2]. US equity futures also point to a negative opening, mirroring the sell-off in Asia [1][2].
The market reaction was further exacerbated by US President Donald Trump’s announcement that the US military will enforce a blockade in the Strait of Hormuz, starting at 10:00 Eastern time (14:00 GMT) on Monday, aiming to block all vessels from Iran and put pressure on China, the main recipient of Iranian oil [2]. Iranian authorities warned that the blockade would violate the ongoing two-week ceasefire, and the Revolutionary Guard threatened severe action against any military vessels approaching the area [2]. Despite these developments, the ceasefire remains in place, and Trump stated he is indifferent to Iran returning to negotiations, leaving open the possibility for talks to resume [2].
Commerzbank’s Thu Lan Nguyen notes that the failed negotiations and the US threat to completely blockade the Strait of Hormuz could significantly worsen the global shortage of oil and gas in the short term [3]. However, market movements have remained limited, with Brent crude trading just above $100 and EUR/USD below 1.17, indicating that markets still expect eventual de-escalation and are keeping risk premia contained [3]. Implied EUR/USD volatility remains comparatively low, but Commerzbank warns that currency performance could be increasingly affected if the conflict intensifies in the coming months [3].
Sector-wise, Danske Bank observed that cyclicals and semiconductors outperformed defensives last week, with materials and real estate also faring well, while health care and staples sold off [1]. Despite the negative closing, risk appetite was visible throughout last week, but the current developments have shifted sentiment towards caution [1]. The economic calendar is thin on Monday, with Middle East headlines expected to continue driving markets, and upcoming Chinese Trade Balance data and US Producer Prices Index (PPI) figures likely to attract investor attention later in the week [2].
CONCLUSION
The breakdown of US-Iran talks and the threat of a Hormuz blockade have triggered a sharp risk-off move in global markets, with equities and oil prices reacting strongly. While the ceasefire remains in place and markets are still pricing in hopes of de-escalation, the situation is fluid and further developments could significantly impact risk premiums and currency performance. Investors are closely watching Middle East headlines and upcoming economic data for further direction.