Global Markets Weekly Update

U.S.

Major U.S. stock indexes finished the volatile week lower as investors digested escalating conflict in the Middle East in the wake of U.S. and Israeli military strikes on Iran, rising energy-driven inflation risks, and some mixed economic data. Oil prices surged amid concerns about potential supply disruptions and broader geopolitical spillovers. Uncertainty about the conflict’s duration and its potential impact on energy markets also drove U.S. Treasury trading, pushing yields higher as investors reassessed inflation risks and the outlook for Federal Reserve policy.

Of the major equity indexes, the S&P MidCap 400 Index performed worst, shedding 4.61%, followed by the Russell 2000 Index, Dow Jones Industrial Average, and S&P 500 Index. The Nasdaq Composite held up best but still declined 1.24%.

ISM data point to continued economic expansion

Data from the Institute for Supply Management (ISM) indicated that U.S. economic activity continued to expand in February. The institute’s manufacturing Purchasing Managers’ Index (PMI) came in at 52.4 for the month, registering the second straight month of expansion and just the third month over 50 in 40 months (readings above 50 indicate expanding activity). The reading was down modestly from the prior month but ahead of consensus estimates. Employment saw a notable month-over-month improvement, while the prices paid component of the index hit the highest level since June 2022.  

The ISM services PMI also surprised to the upside in February, rising 2.3 points to 56.1, ahead of estimates for around 53.9 and the highest reading since July 2022. February was the 20th consecutive month of expansion in the services sector. Strength in new orders, business activity, and employment supported the headline figure, while growth in prices paid persisted but eased somewhat from January.   

Employment data send mixed signals

Meanwhile, labor market data from the week painted a mixed picture. Private payroll processing firm ADP reported that private sector employment increased by 63,000 jobs in February, ahead of consensus estimates and up from January’s downwardly revised 11,000. The reading was the highest monthly total since November and was driven by job gains in construction, education, and health services. 

Other data from the week supported the narrative of a stabilizing labor market. Initial jobless claims for the week ended February 28 came in at 213,000, slightly below estimates and in line with the prior week’s revised level. Consulting firm Challenger, Gray & Christmas also reported a sharp decline in layoffs in February, with U.S.-based employers announcing about 48,000 job cuts during the month versus about 108,000 in January.

However, sentiment shifted Friday after the Bureau of Labor Statistics reported that nonfarm payrolls declined by 92,000 in February, well below expectations for a gain of around 60,000, and the unemployment rate ticked up to 4.4%. The weaker report could complicate decision-making for the Federal Reserve, as policymakers balance signs of labor market cooling against potential inflation pressures from rising energy prices amid escalating conflict in the Middle East. 

Europe

After several consecutive weeks of gains, the pan-European STOXX Europe 600 Index tumbled 5.55% in local currency terms over the week. Risk appetite in Europe deteriorated significantly following U.S. and Israeli military strikes on Iran and the subsequent widening of the conflict across the Middle East. Among major stock indexes, Germany’s DAX declined 6.70%, Italy’s FTSE MIB retreated 6.48%, and France’s CAC 40 Index pared 6.84%. The UK’s FTSE 100 Index lost 5.74%.

Prospect of higher inflation and lower growth

The military action in the Middle East sent oil and gas prices surging, prompting concerns about the effects that prolonged higher energy prices could have on economic growth and inflation. Data released by Eurostat, the European Union’s statistical agency, indicated that even before the Iran conflict, annual inflation in the eurozone hit 1.9% in February, higher than both the 1.7% registered in January and market expectations. Traders’ expectations for monetary policy shifted dramatically, with the probability of the European Central Bank raising rates increasing to more than 50%.

Unemployment unexpectedly falls across the eurozone

The seasonally adjusted unemployment rate in the eurozone fell to an all-time low of 6.1% in January, a level that was marginally lower than both the previous month and analyst expectations. Youth inflation also declined to 14.8% from 15%. .

GDP picks up in Italy while unemployment falls

Italy’s gross domestic product (GDP) rose by 0.3% in the last months of 2025 compared with the previous quarter. Gross fixed investment and housing helped drive economic growth, while net foreign demand detracted due to higher imports and lower exports. Meanwhile, the country’s unemployment declined to 5.1% in January, significantly lower than both the 5.5% rate registered in December 2025 and the 5.6% rate that economists had been expecting.

Mixed data in the UK as markets weigh geopolitical tensions

Investors in the UK assessed rising inflation risks linked to the war in the Middle East, with sterling falling to its lowest level since early December and the country’s Office for Budget Responsibility warning that the conflict could have “very significant impacts” on the UK economy.

On the data front, the S&P Global UK Construction PMI fell in February, reflecting lower levels of new orders by builders. UK house prices rose in February by a higher-than-expected 1.3% year over year, according to the closely watched Halifax House Price Index. 

Japan

Japan’s stock markets fell sharply over the week, with the Nikkei 225 Index declining 5.49% and the broader TOPIX Index down 5.63%. Markets were highly volatile amid uncertainty about the duration and scope of the conflict in the Middle East. Investors sought to assess the potential impact of higher crude oil prices on domestic inflation, given Japan’s significant reliance on oil and gas from the Gulf region.

Keeping a close eye on the fallout from the Middle East conflict, Bank of Japan (BoJ) Governor Kazuo Ueda said that depending on how the situation unfolds, the impact on the global economy and Japan’s economy could be significant. The impact could be felt through channels such as crude oil and other energy prices, as well as international financial markets. While the conflict clouds the outlook for Japan’s economy, Ueda reiterated that the BoJ will continue to raise interest rates if the economy and prices move in line with its quarterly projections. The yield on the 10-year Japanese government bond rose to 2.15% from 2.12% at the end of the prior week. 

In the currency markets, the yen weakened to about JPY 157.6 against the U.S. dollar from around JPY 156.1 at the end of the previous week. Finance Minister Satsuki Katayama said that the authorities were monitoring the decline in the yen with a strong sense of urgency, in close coordination with the U.S., and that intervention in the foreign exchange market remained an option to support the Japanese currency.

In domestic economic developments, hopes of sustained wage growth momentum were buoyed by the Japanese Trade Union Confederation, known as Rengo, asking its member unions to demand an average wage increase of 5.94% this year, only slightly lower than last year’s 6.09% request. Japan’s spring “shuntō” wage negotiations between labor unions and company management are closely watched by the government and the BoJ as they are a clear annual signal of whether wage growth is strong and broad enough to sustain a virtuous cycle of wages rising in tandem with prices to boost economic growth.

China

China’s equity markets retreated as investors weighed the escalating conflict in the Middle East along with its implications for oil prices and global growth against Beijing’s newly unveiled growth target and policy signals. The onshore benchmark CSI 300 Index dropped 1.07%, and the Shanghai Composite Index declined 0.93% in local currency terms, according to FactSet. In Hong Kong, the benchmark Hang Seng Index slid 3.28%.

China signals comfort with slower growth 

China outlined its economic priorities for 2026 at the week’s National People’s Congress, the annual policy-setting parliamentary meeting. China set a GDP growth target range of 4.5% to 5% for 2026, the lowest since at least the 1990s and the first reduction since 2023. The budget deficit is projected at around 4% of GDP, roughly in line with last year, while the consumer inflation target remains at 2%. The targets mark the first year of China’s new five-year plan through 2030. Policymakers signaled continuity in their strategic focus on technology self-sufficiency and strengthening leadership in advanced manufacturing, even as headline growth expectations moderate.

Premier Li urges China to strengthen capabilities amid global strains

Premier Li Qiang in the annual government work report said that China must “hone our capabilities to navigate external challenges.” He cited boosting domestic demand as the country’s top policy objective in 2026, with renewed emphasis on expanding investment. Beijing unveiled new financing tools to boost investment worth CNY 800 billion (USD 116 billion) from CNY 500 billion in 2025. Local governments will be permitted to issue CNY 4.4 trillion in special purpose bonds to fund investment projects. The government also plans to issue CNY 1.3 trillion in ultra-long special sovereign debt, and CNY 250 billion in special bonds will be earmarked to continue its consumer goods trade-in programs, down from CNY 300 billion allocated last year. Defense spending is set to rise 7%, the slowest increase since 2022. 

China’s February factory data sends mixed signals

February manufacturing data offered a mixed picture, highlighting resilience in external demand alongside softer domestic conditions. The official manufacturing PMI edged lower to 49.0 from 49.3 in January, remaining in contraction territory, though the reading may have been affected by Lunar New Year timing. By contrast, the private RatingDog China General PMI compiled by S&P Global rose to 52.1 from 50.3 previously. The divergence reflects differences in survey composition: The official gauge skews toward large, state-owned and domestically oriented firms, while the private survey captures smaller, export-focused companies. 

Other key markets

Iran

U.S.-Israeli strikes and regional retaliation raise geopolitical risk premium

This week, the United States and Israel conducted coordinated strikes on multiple targets inside Iran, killing the Supreme Leader Ayatollah Ali Khamenei—who had led the country for nearly four decades—alongside senior regime figures. Iranian authorities responded with missile and drone activity directed toward Israel, U.S.-linked assets, and regional infrastructure. The scope of the strikes and retaliation marks the most significant direct escalation between the parties in years, raising concerns about broader regional involvement and potential disruption to energy infrastructure and shipping routes.

The escalation has centered market attention on two key uncertainties: the duration of the conflict and the risk of disruption to oil flows, particularly through the Strait of Hormuz. Roughly one-fifth of global oil consumption and a meaningful share of global liquefied natural gas (LNG) trade transit this narrow waterway, making it a well-known choke point for energy markets. Even without a full closure, heightened tensions can increase shipping and insurance costs and embed a geopolitical premium into energy prices.

Initial market reaction

Markets responded quickly to the escalation. Oil prices moved higher on fears of supply disruptions, with Brent crude rising sharply in the immediate aftermath. Energy equities outperformed, while broader global equity markets saw increased volatility and periods of risk aversion. Safe-haven assets, including U.S. Treasuries and gold, attracted flows.

The primary transmission channel to global markets has been energy. According to T. Rowe Price energy analyst Priyal Maniar, the oil market entered this episode with modest oversupply and some spare capacity, suggesting that the market’s initial move reflects risk premium as much as confirmed physical disruption.

Emerging markets reacted in line with historical patterns seen during prior oil supply shocks. Countries that are net energy importers—particularly in Asia and Central and Eastern Europe—experienced currency weakness and higher bond yields as investors priced in the potential for higher inflation. 

What could come next
Looking ahead, markets are likely to focus on these variables:

1. Energy supply continuity.
   If oil and LNG exports continue to flow without sustained physical disruption, the current spike in prices may gradually retrace as risk premium fades. If, however, damage to infrastructure or shipping routes proves persistent, energy prices could remain elevated, reinforcing inflation pressures globally.
2. Duration of the conflict.
   A short, contained episode may resemble previous flare-ups in the region, where volatility subsided once immediate risks receded. A prolonged confrontation—particularly one that disrupts Hormuz shipping or draws in additional regional actors—could increase the probability of more entrenched inflationary pressures and sustained volatility.

From a global perspective, higher oil prices act as a tax on consumers and businesses, potentially weighing on growth. At the same time, they provide revenue support to exporting countries. The net impact on global markets will depend on how persistent the shock proves and how quickly energy markets adjust through increased production, strategic reserves, or demand moderation.

Longer-term considerations
Geopolitical shocks of this magnitude often drive sharp short-term repricing but do not always translate into lasting structural shifts. In some scenarios, a more durable resolution of regional tensions could ultimately reduce longstanding risk premia embedded in Middle Eastern assets. However, that outcome remains uncertain at this stage.

As the situation evolves, volatility is likely to remain elevated. We continue to monitor developments closely and assess their implications for global growth, inflation, and financial markets.