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US stocks sold off, oil and natural gas rallied, and the US dollar gained as US Treasuries and gold attracted safe-haven flows. Mounting tensions between Israel and Iran, alongside Donald Trump’s early departure from the G7 meeting, spurred concerns that the US could become involved in the Middle East crisis.

Investors are taking risk off the table, bracing for further escalation and a potential prolongation of tensions with Iran.

All this sets the stage for the Federal Reserve’s (Fed) latest policy decision and the release of its updated dot plot later today. The Fed is not expected to change rates at this meeting. The base case remains two rate cuts this year, with the first likely not before September, according to Fed funds futures pricing. While the economic projections and dot plot could shift market expectations, rising geopolitical and trade uncertainties mean the Fed’s growth and inflation forecasts may lack precision, and should be taken with a grain of salt.

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Stocks in Europe and the US rallied as oil and gold retreated yesterday on news that Iran is willing to resume talks on its nuclear program. The market interpreted this as a sign that Iran either has no intention — or possibly no means — to escalate the war, easing concerns about potential disruption to the Strait of Hormuz, a critical chokepoint through which around 20% of global oil and gas flows transit.

However, this is not a classic de-escalation story. While Iran appears to be signalling restraint, former President Donald Trump urged the evacuation of Tehran, and Israel has vowed to continue its strikes.

As such, energy prices rebound this morning, while equity futures hint at bearish session.

What could happen from here, and how energy markets could impacted?

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Headlines were busy over the weekend as hostilities between Iran and Israel continued. An Iranian gas field in the Persian Gulf was hit on Saturday, fueling concerns that the escalation could spill over into global energy markets.

US crude opened the week above $76 per barrel, and Brent crude briefly pushed above $84 per barrel. However, both benchmarks quickly gave back gains. Natural gas also spiked at the open, breaking above its 100-day moving average, before retreating. The US dollar edged higher on haven flows, while gold, which opened at record levels, is also paring gains. The early trading reaction points to a surprisingly muted response from markets despite intensifying Middle East tensions.

This week, markets will remain focused on Middle East developments, energy prices, and a slew of central bank decisions: the Fed, BoE, SNB, and BoJ are all in play.

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Israel attacks Iranian nuclear facilities. Iran sends 100s of drones on Israel. Oil jumps, the US dollar and safe haven assets rally as equities come under pressure as geopolitical tensions mount.

What’s next?

Back in October 2024, Israel had launched a major strike on Iranian nuclear facilities. At the time, Iran responded with drone attacks that were mostly intercepted and perceived more as a warning than a retaliation. Tensions eventually eased and markets quickly settled. A similar de-escalation is possible now—but not guaranteed. Judging by the price action, the market’s response to last night’s attack has been very strong.

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The relief that the US and China is replaced by rumours that the EU will hardly ink a deal before the July deadline, and Trump has threatened other Asian nations with fresh tariffs—saying his administration will send letters within two weeks to inform them of unilateral tariffs as a pressure tactic.

So, optimism is waning. Investors are also focused on the upcoming US 30-year bond auction to get a feeling of how well the latest US debt news have been digested.

The US dollar is significantly lower following the CPI release and renewed tariff and debt concerns. The EURUSD finally cleared the 1.15 offers and is consolidating above that level.

In equities, Oracle jumped 7.5% in after-hours trading on a set of better-than-expected quarterly results and a bullish AI-driven outlook, while Nvidia’s Jensen Huang pointed at a potentially massive new revenue stream for his business: quantum computing.

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Trade headlines are striking an optimistic tone this week. According to Bloomberg, US and Chinese officials have agreed on a plan ‘to ease trade tensions,’ a move that could revive the flow of sensitive goods between the world’s two largest economies. Meanwhile, the US and Mexico appear close to finalising a deal that would lift the 50% tariffs on steel imports.

Risk sentiment across Asian markets is broadly positive, but US and European equity futures are modestly lower this morning, likely reflecting some disappointment over the lack of concrete detail in trade negotiations. Officials are now expected to present the proposals to their respective presidents.

In the meantime, investors will focus ontoday’s US CPI report and UK Chancellor Rachel Reeves spending details.

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The week started on a quiet note in the US and with some weakness in Europe, where many were off due to a religious holiday. But futures are in positive territory this morning as traders return to their desks.

One of the main drivers of optimism is the renewed momentum in US/China trade talks. The first day of the second round of negotiations reportedly went relatively well. There hasn’t been a breakthrough yet, and the talks in London continue today. Still, rumours are circulating that the US may be willing to make concessions on tech exports in exchange for China easing restrictions on rare earth metal exports.

As such, risk assets are up, while safe havens are soft this morning.

In equities, Apple unveiled its new “Liquid Glass” interface at its Worldwide Developers Conference, that failed to impress investors while TSMC released its May sales figures this morning, reporting a strong 39.6% year-on-year gain. The stock rose in Taiwan on the news and may help lift Nvidia at the US open.

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Last week ended on a positive note. Improved headlines on the trade front between the US and China and a set of better-than-expected US jobs data helped lift the S&P 500 by 1.5% over the week. The Nasdaq 100 rallied 2% despite a sharp selloff in Tesla shares amid a heated dispute between Donald Trump and Elon Musk. Friday’s rally was driven largely by a narrative that the US economy remains surprisingly resilient despite trade chaos and geopolitical uncertainty. But the US 2-year yield jumped past the 4% mark on Friday. Don’t bet that the Federal Reserve (Fed) will act as a catalyst for equity bulls. However, a strong auction of 30-year US bonds on Thursday could help ease concerns at the long end of the yield curve – as the 30-year yield opens the week just below the 5% psychological level.

More positive trade news could also help sentiment. US and China will hold the second round of trade negotiations this Monday in London. US crude consolidates below $65pb mark, while Chinese equities are slightly up despite soft trade and inflation data.

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Donald Trump and Elon Musk went from best friends to worse enemies, while relations between Trump and Xi look better after the much-expected phone call between the two leaders. The rare earth metals ETFs are up while stock investors remain on the sidelines before the release of the latest jobs data from the US before the weekly closing bell... that could – maybe – further boost the dovish Federal Reserve (Fed) expectations and send major indices higher.

Elsewhere, the European Central Bank (ECB) cut rates yesterday but signalled the end of the easing cycle, crude oil continues to see support near $64.20pb mark and silver rallied nearly 10% this week as momentum traders joined in force after the price cleared an important psychological level.

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