Global risk-off sentiment drives equities lower amid Middle East tensions and rising energy prices

Market Commentary

US equities extended their decline at the end of last week, with major indices falling to multi-month lows as escalating tensions in the Middle East and a sharp rise in energy prices weighed heavily on sentiment. The sell-off pushed benchmarks closer to correction territory, with risk appetite deteriorating amid fears of a stagflationary shock. Geopolitical risks remained the dominant driver, as reports of supply disruptions — including Iraq declaring force majeure on oilfields and attacks on key energy infrastructure across the region — fuelled a surge in oil and LNG prices. Additional concerns emerged around potential US military involvement, with the Pentagon preparing further deployments and speculation over possible action targeting Iranian export infrastructure. These developments reinforced a pro-inflationary backdrop at a time when markets are already grappling with elevated price pressures.

Macro conditions compounded the negative tone. A hotter-than-expected PPI print and hawkish commentary from selected FOMC members earlier in the week drove yields higher, while the Federal Reserve’s decision to hold rates steady within the 3.50%–3.75% range did little to ease concerns around restrictive financial conditions. The combination of rising input costs and tight monetary policy heightened stagflation fears, further pressuring equities. The dollar remained firm, supported by safe-haven demand as the conflict—now in its fourth week—showed no signs of de-escalation. Escalatory rhetoric between the US and Iran, including threats around energy infrastructure and the Strait of Hormuz, continued to underpin market volatility and reinforce a cautious global risk environment.

European equities reversed early gains to close sharply lower at the end of the week, as persistent volatility and rising geopolitical risks weighed on sentiment. Investor focus remained firmly on the Middle East conflict, where escalating disruptions to energy supply intensified concerns around the region’s economic outlook. The sell-off was driven largely by a renewed surge in energy prices, with Brent crude climbing to multi-year highs following attacks on key refining infrastructure. Additional reports pointing to potential US action targeting Iran’s export facilities further unsettled markets, reinforcing fears of a prolonged supply shock. Against this backdrop, stagflation risks in the Eurozone moved back into focus, pressuring risk assets. Currency markets reflected the shift toward safety, with the euro weakening over the week as investors rotated into the US dollar amid heightened inflation concerns linked to the energy shock.

At the same time, expectations for further policy tightening by the European Central Bank strengthened. Money markets are now pricing in at least two rate hikes in 2026, with the possibility of a third, as policymakers signal a growing willingness to respond to persistent price pressures. Recent commentary from ECB officials highlighted that a near-term rate increase remains on the table should inflation risks continue to build, reinforcing the more hawkish policy outlook.

In Asia, the negative tone carried through to Chinese markets, where equities posted notable weekly declines as investors assessed the broader economic fallout from elevated energy prices and geopolitical tensions. While sentiment remained fragile, a modest pullback in oil prices provided some near-term relief following signals of limited military escalation, helping to temper immediate supply shock concerns. China appears relatively better insulated from the energy shock compared to its regional peers, supported by strategic reserves and a continued shift toward renewable energy sources. This has helped cushion the impact of higher crude prices, even as global inflation risks remain elevated.

On the policy front, the People’s Bank of China maintained its key lending rates at record lows for a tenth consecutive month, reinforcing a preference for stability amid a highly uncertain external backdrop. The decision reflects a balancing act between supporting growth and managing inflation risks linked to energy markets, particularly as authorities signal a more modest economic expansion target for the year.

Despite the cautious policy stance, recent data has pointed to pockets of resilience in the domestic economy, with stronger-than-expected activity in industrial output, retail sales, and fixed-asset investment. However, underlying headwinds persist. External pressures—including subdued global demand, ongoing trade frictions, and a firm US dollar—continue to weigh on the yuan, while domestically, property sector weakness, fragile sentiment, and subdued labour market dynamics remain constraints on a sustained recovery.

Locally, South African markets followed the global risk-off trend, closing the week lower, with the JSE All Share Index down 0.45% at 110 070 points. The decline reflected profit-taking after the index’s recent peak near 129 339 earlier in the month, contributing to a 12% monthly drop, although year-to-date gains remain strong at nearly 24%. The downturn was broad-based, with the FTSE/JSE Top 40 falling 0.61%, while the resources sector remained under pressure amid softer metal prices, adding further strain to the broader market. Currency weakness amplified the negative sentiment, with the rand trading at R17.01 per US dollar, up 1.61% on the week and touching an intraday high of R17.12. This marked a 6.25% depreciation for the rand over the month, reflecting heightened risk aversion and external pressures.

In fixed income, the yield on the 10-year government bond increased by 0.15 percentage points to 9.20%, reflecting both global rate pressures and a more cautious investor stance. While external headwinds persist, expectations for modest GDP growth of around 1.50% continue to offer some underlying support, with projections pointing to a potential recovery toward 109 711 by quarter-end.

In commodities, price action remained volatile, driven primarily by ongoing supply-side concerns in global energy markets. Oil prices experienced a sharp shock during the week, reinforcing upward pressure on domestic fuel costs following the latest adjustments earlier in the month, where petrol rose by 20c/l and diesel increased by between 62c/l and 65c/l.

Gold also came under notable pressure, with international prices declining sharply amid rising US yields and a firmer dollar. The move marked one of the worst weekly performances in years, with losses accelerating over the final sessions despite gold still holding strong gains on a year-to-date basis. The weakness in bullion filtered through to the local market, with rand-denominated prices easing to around R2 459 per gram. This added further strain to the JSE’s resource sector, compounding existing pressures from softer commodity prices and a weaker currency backdrop.