Escalating conflict in the Middle East has sent shockwaves through global markets. According to LSEG Lipper data, investors engaged in significant selling of U.S. equity funds recently, resulting in a net outflow of $21.92 billion (approximately 150 billion Chinese Yuan) for the week. This marks the most severe single-week net outflow from U.S. stock funds in nearly two months. Notably, U.S. growth funds experienced outflows of $11.15 billion. Overnight, U.S. markets closed sharply lower, with the Dow Jones Industrial Average plunging over 900 points intraday and the Nasdaq Composite falling 1.59% by the close. Major U.S. tech stocks declined broadly: Intel dropped over 5%, NVIDIA fell 3%, while Amazon.com, Tesla Motors, and Meta Platforms, Inc. each declined over 2%. Apple slipped more than 1%, and Microsoft and Google closed slightly lower.
The escalation of conflict involving the U.S., Israel, and Iran has triggered a sharp rise in global oil and natural gas prices, intensifying investor concerns about inflation. This development potentially delays the Federal Reserve's interest rate cutting cycle, which is a primary reason for the sell-off in U.S. equity funds. The large-scale divestment reflects investor efforts to reduce risk exposure due to worries about the Middle East conflict's escalation and its potential impact on inflation and interest rate outlooks. In the week ending March 4th, investors net withdrew $21.92 billion from U.S. stock funds, the largest weekly net outflow since January 7th.
Reuters noted that as the Middle East conflict entered its seventh day, international oil prices were heading for their largest weekly gain since early 2022 by Friday, exacerbating inflation fears and potentially postponing the Fed's rate cuts. LSEG Lipper data showed that in the week to March 4th, U.S. growth funds saw outflows of $11.15 billion, the largest weekly outflow since the week of December 17th, 2025. However, investors continued purchasing value funds, adding $146 million for a fourth consecutive week of net buying. Simultaneously, U.S. sector funds attracted $1.2 billion in inflows for the week, with investors snapping up $1.65 billion for industrial sector funds, $671 million for utility funds, and $582 million for metals and mining sector funds.
Safe-haven demand drove net inflows into U.S. money market funds to $22.51 billion for the week, an eight-week high. U.S. bond funds saw their ninth consecutive week of net inflows, totaling $7.29 billion. Short and intermediate-term investment-grade bond funds, municipal bond funds, and short and intermediate-term government and treasury funds recorded substantial net purchases of $1.71 billion, $1.44 billion, and $929 million, respectively. So far this week, the MSCI World Index has fallen over 2.5%, on track for its worst weekly performance since early April 2025. Global equity funds experienced a net outflow of approximately $1.44 billion, primarily dragged down by outflows from U.S. stock funds.
European equity fund inflows slowed to $8.8 billion from about $11.88 billion the previous week, while Asian funds attracted $7.43 billion in net inflows. Among global sector funds, industrial and energy sectors recorded net inflows of $2.53 billion and $1.21 billion, respectively, while financial sector funds saw outflows of approximately $1.9 billion. Safe-haven demand pushed global money market fund net inflows to $20.22 billion, roughly flat with the previous week's inflow. Global bond funds also achieved a ninth straight week of net buying, with investors committing $16.12 billion. Inflows into short-term bond funds surged to $3.62 billion from about $1.23 billion a week earlier. Euro-denominated bond funds and corporate bond funds also recorded large net inflows of $2.31 billion and $2.09 billion, respectively.
Conversely, investors sold off gold and precious metals commodity funds worth approximately $2.62 billion, marking the second weekly net sell-off in eight weeks. In emerging markets, equity fund inflows decreased to an eight-week low of $5.3 billion. Net purchases of bond funds also dropped to $2.5 billion from about $3.04 billion the previous week.
**Surge in International Oil Prices** The Middle East conflict has triggered significant volatility in energy markets. Near-paralysis of shipping through the Strait of Hormuz propelled U.S. crude futures sharply higher. Traders began pricing in expectations of more hawkish stances from major central banks, fearing inflation will rise if energy prices continue to surge. On Friday, the front-month WTI crude futures contract soared over 12%, closing at $91.27 per barrel. The front-month Brent crude contract rose over 9%, surpassing $93 per barrel. For the week, WTI crude accumulated a 36% gain, while Brent crude rose nearly 28%.
Bloomberg pointed out that oil prices continued their strong ascent despite the U.S. President hinting at "emergency action" to stabilize prices and the U.S. Treasury easing restrictions on India's purchases of Russian oil. With no signs of conflict de-escalation, Goldman Sachs Group warned that oil prices could surpass $100 if supply disruptions persist. European diesel futures surged over 50% for the week, while central banks expressed concern about potential resurgent inflation. Qatar's energy minister even warned that oil prices could reach $150.
According to a report from the United Kingdom Maritime Trade Operations, commercial shipping through the Strait of Hormuz has reached a state of "near-complete standstill" due to "security threats, insurance restrictions, operational uncertainty, and physical disruptions." Since the U.S. and Israel initiated military actions on February 28th, the conflict has affected over a dozen countries, severely impacting oil markets. As hostilities escalated, shipping through the Strait of Hormuz was nearly halted, obstructing global oil supplies and forcing producers to begin shutdowns, affecting both refineries and tankers.
Qatar's energy minister stated to media that if tankers cannot transit the Strait of Hormuz, crude prices could skyrocket to $150 within two to three weeks. The prospect of a prolonged conflict unsettled markets. Data from the International Energy Agency showed that approximately 20 million barrels of oil and products flowed through the Strait of Hormuz daily last year, but ship-tracking data indicated a sharp decline in traffic through the passage this week.
Samantha Dart, Co-Head of Global Commodities Research at Goldman Sachs, stated, "Assuming depressed oil flows through the Strait of Hormuz persist for the next five weeks, Brent prices could break the $100 per barrel mark."
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