Middle East War updates: Despite headway in talks, Iran warns of wider strikes against US

Markets are expected to feel a significant impact in the coming week from developments in the Middle East war over the weekend. The key events are summarised below.

Even as Iran’s top diplomat indicated progress in diplomatic talks, Supreme Leader Mojtaba Khamenei instructed his senior military commanders to prepare for a fresh confrontation with the United States (US) and Israel, while widening Tehran’s options for retaliation.
Khamenei said: “Every level and type of threat must be met with an immediate, effective response, without geographical limitations,”
A diplomatic resolution remains President Donald Trump’s preference, according to US Secretary of State Marco Rubio, who said Washington had taken no decision to resume strikes on Tehran. Rubio also maintained that the US has the capabilities needed to accomplish any military objective Trump chooses to pursue.
An Iranian delegation was holding talks with mediators in Qatar, according to Iranian Foreign Minister Abbas Araghchi.
The conditions, Araghchi added, include the removal of sanctions imposed after the Islamabad memorandum and a reduction in US forces in the region. He added: “We demand the restoration of oil waivers and the release of all our frozen funds, including those held in Qatar,”

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How Does Risk Sentiment Affect Markets? FAQs

How do "risk-on" and "risk-off" describe sentiment in financial markets?

Investors’ willingness to take risk over a given period is commonly described in financial markets using the terms “risk-on” and “risk off”. Optimism about the outlook encourages investors to purchase riskier assets in a “risk-on” market. By contrast, concerns about the future prompt investors in a “risk-off” market to ‘play it safe’. They favour lower-risk assets offering greater certainty of a return, even where that return is relatively modest.

Which assets best indicate changes in risk sentiment?

A favourable growth outlook typically supports equities and most commodities, apart from Gold, during “risk-on” periods. Stronger demand also lifts the currencies of major commodity-exporting countries, while Cryptocurrencies advance. When markets turn “risk-off”, Bonds tend to gain, particularly major government Bonds. Gold performs strongly too, alongside safe-haven currencies including the Japanese Yen, Swiss Franc and US Dollar.

Why do certain currencies gain in "risk-on" markets?

In “risk-on” markets, currencies that generally appreciate include the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD), as well as minor FX currencies such as the Ruble (RUB) and South African Rand (ZAR). Growth in these economies depends heavily on commodity exports. As investors anticipate stronger economic activity and, consequently, greater demand for raw materials, commodity prices typically increase during risk-on periods, supporting these currencies.

Why do investors favour certain currencies in "risk-off" markets?

During “risk-off” periods, the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) are the main currencies that generally strengthen. Reserve-currency status supports the US Dollar, as does investors’ tendency to purchase US government debt during a crisis. Such debt is regarded as safe because the world’s largest economy is considered unlikely to default. The Yen benefits from stronger demand for Japanese government bonds: domestic investors hold a large proportion of these bonds and are unlikely to sell them off, even during a crisis. For the Swiss Franc, support comes from Switzerland’s strict banking laws, which provide investors with enhanced capital protection.