U.S. financial markets experienced a volatile week as investors responded to escalating geopolitical tensions in the Middle East following military strikes by the United States and Israel on Iran. Concerns that the conflict could disrupt global oil supplies pushed energy prices higher, increasing fears that inflation may rise again. These developments also affected the bond market, where U.S. Treasury yields moved higher as investors reassessed inflation risks and the potential response from the Federal Reserve.
Major stock indices ended the week lower. Smaller companies were hit hardest, with the S&P MidCap 400 falling 4.6% and the Russell 2000 declining significantly as well. The Dow Jones Industrial Average and the S&P 500 also posted losses, while the technology-heavy Nasdaq Composite proved relatively resilient but still ended the week down. The overall market sentiment reflected uncertainty about how long geopolitical tensions could last and what impact they might have on global energy markets.
Despite market volatility, economic data suggested that the U.S. economy continues to expand. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index (PMI) registered 52.4 in February, indicating growth in the sector for the second consecutive month. Employment within manufacturing improved, although rising input prices signaled potential inflation pressures. The services sector showed even stronger momentum, with the services PMI rising to 56.1, marking 20 consecutive months of expansion. Growth in business activity and new orders supported the strong reading.
However, labor market data presented a more mixed picture. Private payroll data showed job creation accelerating in February, with gains in construction, healthcare, and education. Initial jobless claims also remained relatively stable, suggesting that layoffs are not accelerating significantly. Yet the government’s official employment report surprised markets when it showed nonfarm payrolls declining by 92,000 jobs and the unemployment rate rising to 4.4%. This unexpected weakness could complicate the Federal Reserve’s policy decisions as it weighs slowing employment growth against rising inflation risks driven by higher energy prices.
Europe: Rising Energy Prices and Geopolitical Risks Pressure Markets
European markets declined sharply during the week as investors reacted to escalating conflict in the Middle East and the potential economic consequences of rising energy prices. The pan-European STOXX Europe 600 Index dropped more than 5%, ending several weeks of gains. Major national indices also saw significant declines, including Germany’s DAX, France’s CAC 40, Italy’s FTSE MIB, and the UK’s FTSE 100.
The primary concern for investors is that higher oil and gas prices could slow economic growth while simultaneously pushing inflation higher across Europe. Even before the geopolitical escalation, inflation in the eurozone had already begun rising. According to Eurostat, annual inflation increased to 1.9% in February from 1.7% in January, slightly above market expectations. As a result, financial markets are now increasingly pricing in the possibility that the European Central Bank may raise interest rates sooner than previously anticipated.
Despite these concerns, labor market conditions in the eurozone remain relatively strong. The unemployment rate fell to 6.1%, the lowest level on record, while youth unemployment also declined slightly. These figures suggest that the region’s labor market continues to show resilience even amid broader economic uncertainty.
Italy provided one of the more positive economic updates during the week. The country’s economy grew by 0.3% in the final quarter of 2025, supported primarily by investment and housing activity. At the same time, unemployment in Italy declined to 5.1%, lower than both the previous month and economists’ forecasts.
In the United Kingdom, investors are closely monitoring how the Middle East conflict could affect inflation and economic stability. The British pound weakened during the week as concerns about economic risks increased. Economic data also presented mixed signals. The UK construction sector slowed, with fewer new orders reported by builders, while housing prices rose more than expected, increasing by 1.3% year over year according to the Halifax House Price Index.
Asia: Markets Assess Economic Signals from Japan and China
Asian markets also felt the impact of rising geopolitical tensions and higher energy prices. In Japan, stock markets declined sharply, with both the Nikkei 225 and the broader TOPIX index falling more than 5% during the week. Japan is particularly sensitive to fluctuations in global energy prices due to its heavy reliance on imported oil and gas from the Middle East.
Bank of Japan Governor Kazuo Ueda noted that the conflict could have significant implications for both the global and Japanese economies, particularly through higher energy prices and increased financial market volatility. While uncertainty remains high, the Bank of Japan indicated that it could continue raising interest rates if economic conditions and inflation evolve as expected.
Currency markets also reflected investor caution. The Japanese yen weakened against the U.S. dollar, prompting Japanese authorities to signal that they are monitoring the currency closely and may intervene if necessary to stabilize it.
Meanwhile, China’s stock markets also declined as investors balanced geopolitical risks with the country’s latest economic policy signals. The Chinese government used its annual National People’s Congress to outline economic priorities for the coming year. The country announced a GDP growth target of 4.5% to 5% for 2026, slightly lower than previous years but still reflecting steady growth ambitions.
Chinese policymakers also announced new investment measures aimed at supporting economic activity, including expanded government bond issuance and increased funding for infrastructure and technology initiatives. Manufacturing data from February presented mixed results. Official surveys indicated continued
weakness in large, state-owned manufacturers, while private-sector data pointed to stronger performance among export-focused companies.
Overall, while global markets remain cautious amid geopolitical tensions, policymakers and investors continue to closely monitor economic data and policy developments that could shape the outlook for growth and inflation in the months ahead.
Looking Ahead –
As geopolitical tensions, energy prices, and economic data continue to evolve, global markets are likely to remain sensitive to both policy decisions and developments in the Middle East.
