Navigating Middle East uncertainty and tariff risks

•  Markets ignore tariff concerns as US and European stocks continue to recover
• Risks remain
• Conflict is ongoing with no end in sight
• Capitulation sell off is over, as markets are showing signs of learning to live with uncertainty

Headlines continue to drive markets right now, they have fuelled a rebound in stocks and a decline in the oil price so far on Wednesday. Hopes are high that the conflict in the Middle East might be short lived, after a newspaper report that Iran contacted the US over the weekend about ending the war. This has helped European stocks to recover and the oil price has also pulled back to the tune of 1% for Brent crude oil today.

Markets ignore tariff concerns as US and European stocks continue to recover

However, if you thought tariffs would be on the back burner for the duration of this conflict, you would be mistaken. The US Treasury Secretary then announced that President Trump’s 15% global tariff rate would come into effect from this week. This is having a minimal impact on markets for now, but it is worth watching.  

As we move towards the US open, US equity futures are also in recovery mode, and if risk sentiment continues to improve then we could see Asian stocks recover later tonight. European stocks are being led higher by tech, industrials and financials, after these sectors sold off sharply on Tuesday. The top performing stocks in the FTSE 100 include a mixture of energy names, miners, pharma and consumer stocks. However, the UK index is underperforming its European counterparts as the plethora of defensive names in the UK index hold the index back today.

The global sovereign bond market remains in recovery mode, especially in the UK where yields are lower by more than 3 bps. Overall, we expect asset prices to remain fretful in the coming days, as we find out more about the aims of Operation Epic Fury, and how long it will take to complete.

Risks remain

There are still plenty of risks for both stocks and commodities. Saudi Arabia said that Iran attempted to attack the Ras Tanura refinery, this is one reason why the oil price decline has been moderate so far on Wednesday, and Brent crude oil could remain above $80 per barrel for the foreseeable. Gold and silver are recovering alongside stocks, while the dollar is retreating and the dollar index remains at the lows of the day.

Conflict is ongoing with no end in sight

For now, the market is absorbing comments from the US Secretary of War, who said that the conflict is escalating, that the US has an unlimited supply of precision bombs and that the US will ‘take all the time that it needs to guarantee success’. This doesn’t suggest that the conflict will be wrapped up quickly. Added to this, NATO forces shot down a ballistic missile over Turkey earlier today, which suggests that the conflict is broadening, and getting closer to the Eastern Mediterranean.

Capitulation sell off is over, as markets are showing signs of learning to live with uncertainty

As expected, the capitulation sell off that impacted European and Asian markets in the last 24 hours has not been sustained, which is typical. This suggests that financial markets are trying to adjust to the uncertainty in Iran and the Middle East. While markets were extremely sensitive to downside risk earlier this week, they are also sensitive to upside risks. The merest whiff that a resolution to the conflict is on the cards is helping European stocks to rebound; if this continues during the European session, then Asian stocks could also recover after a 12% drop in the world’s top performing index for 2025, the South Korean Kospi.

Although markets are in recoverty mode, it is worth remembering that sentiment is fragile and headline risk can materialize at any time.