Financial Markets React to Hopes of De-escalation in Middle East Conflict

The situation on global capital markets has entered a phase of cautious waiting after a period of panic-driven flight to safe havens. Hopes for a de-escalation of the Middle East conflict have led to a relaxation of tensions in access to dollar liquidity, which previously paralyzed some interbank transactions. Nevertheless, the scale of uncertainty remains enormous, best illustrated by the record inflow of capital into money market funds, whose assets have risen to an unprecedented level of $8.27 trillion. Investors are choosing cash, fearing the long-term effects of the war on supply chains and energy prices. A significant boost to sentiment was China's announcement of sending a special envoy to the region for mediation. Beijing's diplomatic offensive coincided with dovish signals coming from the US Federal Reserve. Fed representative Miran clearly advocated for continuing the cycle of interest rate cuts, arguing that geopolitical risks are not a sufficient reason to change the chosen course of monetary policy. On the other hand, US Treasury bond markets continue to show a rising yield trend, which hits developing countries. African dollar bonds have suffered particularly heavily, with investors massively withdrawing capital from them for fear of a worsening debt-to-GDP ratio in the region. In modern history, conflicts in the Middle East have repeatedly caused oil shocks, the most serious of which in 1973 led to a permanent change in the world's financial architecture and the creation of the petrodollar system. The war directly hits specific sectors, with aviation and transport at the forefront. Airline Wizz Air lowered its financial forecasts, citing a drastic increase in jet fuel costs and the suspension of connections in the conflict region. On Asian markets, the price difference between diesel and jet fuel reached a record $70 per barrel, destabilizing global logistics. At the same time, the US services sector showed unexpected resilience, reaching its highest activity in 3.5 years. This dichotomy between strong macroeconomic data and war risk poses a difficult task for regulators. The Bank of Canada also warned of systemic risk emanating from the non-bank financial sector, which under wartime conditions could become a source of financial contagion. „Risks from Iran conflict no reason to delay continued rate cuts” — Miran, Fed Volatility also prevails in the world of digital assets. Bitcoin, which initially lost value sharply due to the outbreak of fighting, has managed to recover a significant portion of its losses. Experts point out that although crypto-assets do not yet serve as a perfect hedge against war, their liquidity means they are being used for rapid reallocation of funds. Meanwhile, investors in commodity markets have once again turned to gold, whose price is rising in response to sustained demand for safe assets.