Middle East tensions return to centre stage as markets reprice risk

Markets have been reminded just how quickly geopolitical risk can return. After several weeks of pricing a smooth path towards de-escalation in the Middle East, sentiment shifted sharply after President Donald Trump declared the memorandum of understanding with Iran "over" following renewed attacks, while still leaving the door open to future negotiations. The comments have prompted investors to rebuild some of the geopolitical premium that had largely disappeared from markets in recent weeks, lifting oil prices while weighing on equities and pushing government bond yields higher.

Brent Crude daily chart

Past performance is not a reliable indicator of future results.

The biggest move has been in energy markets. Brent crude has rebounded strongly from recent lows after briefly threatening to fall below $70 per barrel, as traders reassess the outlook for global supply. Markets had become increasingly comfortable with the view that traffic through the Strait of Hormuz would continue normalising and that Iranian oil exports would help improve global supply. The latest developments challenge that assumption. Iran's attempts to assert greater control over shipping in the Strait, coupled with the US decision to revoke Tehran's waiver to sell oil, have reintroduced uncertainty around future supply and encouraged traders to price in a higher geopolitical risk premium.

Equity markets have also responded. The DAX 40, which had recently pushed to fresh record highs, has retreated as higher oil prices undermine one of Europe's most important tailwinds. Europe remains more exposed than the United States to higher energy costs given its reliance on imported fuel, making the recent rebound in crude particularly significant for regional sentiment. In the US, the Nasdaq was already showing signs of fatigue after a prolonged AI-led rally. The renewed geopolitical uncertainty has added another reason for investors to reduce risk exposure, particularly as higher oil prices raise the possibility of renewed inflationary pressure.

DAX 40 daily chart

Past performance is not a reliable indicator of future results.

The move has also been reflected in bond markets. US Treasury yields have edged higher as investors consider whether another rise in energy prices could complicate the Federal Reserve's inflation outlook. Only last week, softer labour market data had encouraged markets to moderate expectations for further tightening. A sustained increase in oil prices would make that picture less straightforward by raising the risk that headline inflation proves more persistent than anticipated.

The broader question is whether this marks the beginning of a renewed escalation or simply another setback in what is likely to remain a volatile negotiation process. The prevailing expectation is still that neither Washington nor Tehran wants a wider regional conflict, and Trump's decision to leave the door open to further talks supports that view. However, the market reaction illustrates that investors may have become too confident in assuming geopolitical risks had largely disappeared. Rather than removing almost all of the geopolitical premium from oil prices, markets may now begin assigning a greater probability to intermittent disruptions, leaving energy markets—and by extension broader risk assets—more sensitive to headlines than they were just a few days ago.