Last week saw geopolitical tensions in the Middle East remain at the forefront. Iran’s strategy appears aimed at turning the conflict with the United States and Israel into a war of attrition, while Washington strengthens its military presence in the area and seeks international support to ensure the security of the Strait of Hormuz. Oil remains steadily above $100 per barrel, and uncertainty continues to weigh on financial markets, particularly Asian stock markets and global bond yields.
Markets remain cautious ahead of the central bank meetings scheduled for this week: the Fed and ECB are expected to keep rates unchanged, but investors’ attention will be focused mainly on indications regarding the economic and inflationary effects of the Middle East conflict.
The week opened with markets still heavily influenced by geopolitical tensions in the Middle East and their implications for global energy flows. The conflict continues, in fact, to keep investor uncertainty high, with evident effects on commodity prices and stock market trends. In this context, Tehran seems intent on turning the Israeli-American intervention into a costly war of attrition, a dynamic that could explain the US attempt to accelerate with the bombing of military installations on Kharg Island. The operation spared oil infrastructure but hit a key logistical hub for almost all Iranian crude exports and, therefore, an indirectly strategic asset also for China, the main buyer of the Islamic Republic’s oil. At the same time, President Trump has invited several countries, including China itself, to contribute to reopening the Strait of Hormuz by escorting merchant ships with their military fleets. The initiative has so far received a rather lukewarm reception, and the US administration has floated the possibility of postponing the meeting with President Xi Jinping scheduled for the end of the month if Beijing refuses to cooperate. At the moment, therefore, the American president would seem to have no quick exits from the crisis – the so-called “TACO,” now part of the US political lexicon – and has in fact decided to strengthen the military presence in the area, recalling a Pentagon naval unit to the Middle East, arriving in the coming days.
Oil trends continue to reflect geopolitical tensions, with Brent steadily above $100 per barrel and WTI near that threshold. The climate of uncertainty also weighs on global equity markets, with the evident underperformance of Asian indices in countries most exposed to a possible energy choke in the Middle East (Nikkei -3.2%, KOSPI -1.75%). Chinese markets buck the trend, with Shanghai’s CSI 300 slightly up (+0.2%), supported by the fact that so far the transit of ships heading to China through the Strait of Hormuz has not been hindered. Global bond markets are also under pressure, with a generalized rise in yields. The German Bund temporarily fell just below the 3% threshold, while the US 10-year Treasury returned to around 4.30%. Contributing to the movement was also a less-than-brilliant US debt auction, just days after the downward revision of the second reading of Q4 2025 GDP. The figure was revised from +1.4% to +0.7% on an annualized basis, reflecting weaker contributions from exports, consumer spending, and investments, as well as a reduced contribution from public spending. A significant role in the slowdown was attributed to the 43-day federal shutdown. Less favorable indications also come from US consumer confidence: the preliminary estimate for March showed a decline to 55.5 from 56.6 the previous month, although only about half of the survey responses were collected after the conflict began.
On the political-institutional front, in the United States a federal judge has decided to dismiss the proceedings against Fed Chairman Jerome Powell regarding the restructuring work of the central bank’s headquarters. According to the ruling, the charges were made with the aim of pressuring Powell to resign or influencing his monetary policy decisions. The case takes on particular importance in light of the fact that the Supreme Court is still considering the possibility for the US president to remove Fed members from their positions, within the controversy concerning Governor Lisa Cook.
In Europe, attention has remained focused on the implications of the Middle East conflict for growth and inflation. Statements from some ECB members have significantly altered market expectations about the future path of rates. Among these, Slovak Governor Peter Kazimir suggested that a possible rate hike could be closer than operators expect, strengthening the bear flattening movement of the European curve, with yields rising especially on the short end. Currently, markets are beginning to price in the possibility of a rate increase as early as the July meeting. On the political front, in the coming days the European Council will discuss several proposals aimed at containing the impact of rising energy costs, including a possible cap on gas prices for electricity generation, greater flexibility on taxes and levies within state aid rules, and a possible reshaping of the ETS system.
Turning to Italy, the rating agency Fitch has confirmed the sovereign debt rating at BBB+ with a stable outlook, highlighting the presence of a large and diversified economy with high added value, as well as relatively high wealth levels and an improvement in governance over time.
Some structural weaknesses remain regarding the level of public debt and medium-term growth prospects, factors that reduce fiscal flexibility margins and debt reduction capacity. No changes to benchmark rates are expected at this week’s Federal Reserve and ECB meetings, but markets will closely follow comments on the economic effects of the Middle East conflict.
