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

Weekend developments in the Middle East war are expected to have a significant bearing on markets in the week ahead. The main events are summarised below.

  • Despite his top diplomat reporting progress in diplomatic talks, Iran’s Supreme Leader, Mojtaba Khamenei, instructed senior military commanders to prepare for fresh confrontation with the United States (US) and Israel, and to broaden Tehran’s options for retaliation.
  • Khamenei said: “Every level and type of threat must be met with an immediate, effective response, without geographical limitations,”
  • No decision has been taken in Washington to resume strikes on Tehran, according to US Secretary of State Marco Rubio, who said President Donald Trump favours a diplomatic solution. Rubio also said the US still has the capabilities needed to meet any military objective Trump chooses to pursue.
  • An Iranian delegation was in Qatar for discussions with mediators, Iranian Foreign Minister Abbas Araghchi said.
  • Among the conditions, Araghchi said, were the removal of sanctions imposed following 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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Risk sentiment explained: FAQs

Investors’ willingness to accept risk over a given period is commonly described in financial markets using the terms “risk-on” and “risk-off”. Optimism about the outlook characterises a “risk-on” market, with investors more inclined to purchase riskier assets. When sentiment turns “risk-off”, concerns about the future prompt investors to take a more cautious approach. They favour lower-risk assets offering greater certainty of a return, even if that return is relatively modest.

A favourable growth outlook usually supports equities and most commodities, with the exception of Gold, when markets are “risk-on”. Stronger demand also lifts the currencies of major commodity-exporting nations, while cryptocurrencies advance. By contrast, “risk-off” conditions support bonds, particularly those issued by major governments, as well as Gold. Safe-haven currencies, including the Japanese Yen, Swiss Franc and US Dollar, also benefit.

When markets favour risk-taking, the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD) generally strengthen, alongside less widely traded currencies such as the Ruble (RUB) and South African Rand (ZAR). Growth in these economies depends heavily on commodity exports. Commodity prices typically increase during “risk-on” periods, as investors anticipate that stronger economic activity will drive greater demand for raw materials.

Periods of risk aversion typically favour three major currencies: the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF). The US Dollar benefits both from its role as the world’s reserve currency and from investors buying US government debt during crises. That debt is regarded as safe because the world’s largest economy is considered unlikely to default. Demand for Japanese government bonds supports the Yen: a large share of these bonds is owned by domestic investors, who are unlikely to sell them off even during a crisis. For the Swiss Franc, support comes from strict Swiss banking laws that provide investors with greater capital protection.