Markets tread water as Middle East diplomacy offsets geopolitical risk, oil eases and Asia rallies on AI
Europe opened the week in a cautious mode, with markets largely driven by geopolitical risk rather than domestic macro data, as attention remained locked on the Middle East and the evolving situation around the Strait of Hormuz.
Despite escalated rhetoric from US President Donald Trump toward Tehran following the closure of the strategic waterway, signalling continued uncertainty, diplomatic channels appeared to remain partially open. US Vice President JD Vance reported progress in the first round of negotiations, a view echoed by Iranian Foreign Minister Abbas Araghchi. The coexistence of heightened political pressure and limited diplomatic signals is contributing to volatile but contained risk pricing across markets.
Oil extended its downward correction, reflecting a market reassessment of supply disruption risks. The easing in crude suggests that investors are increasingly pricing in the possibility of de-escalation or at least a managed diplomatic pathway, even if structural risks in the region persist. Energy markets, however, remain highly sensitive to any reversal in negotiation dynamics.
European equities traded in a tight range, reflecting a lack of conviction. The FTSE MIB in Milan slipped 0.07%, the CAC 40 in Paris edged up 0.02%, while other major indices remained broadly unchanged. The muted reaction underscores a market in “wait-and-see” mode, with geopolitical signals outweighing earnings or rate expectations in the short term. London’s FTSE 100 rose 0.06%, with additional attention on domestic political uncertainty after media reports suggested Prime Minister Keir Starmer could be preparing to step down, adding a secondary layer of political risk in Europe.
In Asia, sentiment was more constructive. Japanese equities led gains, with the Nikkei 225 closing up 1.55% at 72,353.96 points. The rally was concentrated in technology and artificial intelligence-linked sectors, particularly semiconductors and electronic components. The move highlights the continued dominance of AI-driven capital flows, which are increasingly decoupled from broader macro uncertainty and act as a structural support for select equity markets.
In Italy, banking sector consolidation remains a key domestic driver, with Monte dei Paschi di Siena at the centre of attention amid competing strategic proposals involving Intesa Sanpaolo and Banco BPM. The renewed focus on M&A reflects both regulatory normalization and the search for scale in a fragmented European banking landscape.
Energy markets continued to signal easing immediate stress, with Brent trading in the $75–78 per barrel range and WTI near $75. However, pricing dynamics remain heavily influenced by geopolitical risk premia rather than pure demand fundamentals. European natural gas prices above €42 per megawatt hour indicate that vulnerability in energy supply chains has not fully dissipated.
On currency markets, the euro held steady at 1.14 against the dollar, reflecting balanced positioning ahead of potential macro catalysts.
Eurozone bond markets showed marginal tightening, with the Italy–Germany 10-year spread narrowing to 70 basis points from 71, and the Italian 10-year yield easing to 3.66%. The move suggests a modest improvement in perceived peripheral risk, though within a range that still reflects underlying caution rather than a clear risk-on shift.