Investors and financial markets are bracing for increased volatility as tensions in the Middle East escalate following Iran's unprecedented strike on Israel. The latest conflict has raised concerns about a potential strike and counter-strike cycle, prompting investors to closely monitor the situation and look to oil prices as a guide for their response.

The Middle East crisis comes at a time when financial markets are already rattled by sticky inflation and the prospect of higher interest rates. Many fear that the escalation of the conflict will inject fresh volatility into the markets when trading resumes.

Investors are particularly concerned about the impact on oil prices, with expectations that it could surpass $100 a barrel. In response to the crisis, investors are seeking safe-haven assets such as Treasuries, gold, and the US dollar. Some analysts also anticipate further stock market losses.

However, there are some factors that could potentially temper the spike in nerves. Iran has stated that "the matter can be deemed concluded," and US President Joe Biden reportedly assured Israeli Prime Minister Benjamin Netanyahu that the US won't support an Israeli counterattack against Iran. These developments may provide some relief to investors.

Bitcoin, often considered a barometer of market sentiment, initially sank almost 9% in response to the attacks but rebounded on Sunday, trading near the $64,000 mark. Stock markets in Israel, Saudi Arabia, and Qatar experienced modest losses under thin trading volumes.

While the conflict in the Middle East has yet to impact production, attacks by Iran-backed Houthis in the Red Sea have disrupted shipping routes. Traders worry that a widening conflict in the region could disrupt tanker shipments from the Persian Gulf through the Strait of Hormuz, a crucial chokepoint for global oil supplies.

Global markets have also been affected by the turmoil, with the S&P 500 witnessing its biggest weekly decline since October due to inflation concerns and disappointing bank earnings. In the bond market, traders are weighing the risk that more expensive energy bills may add to inflation fears. While Treasuries tend to benefit in times of uncertainty, the threat of high interest rates could limit their movements.

Amid the uncertainty, gold has experienced a surge, gaining 13% this year and hitting a record above $2,400 an ounce. Investors have also sought the stability of the US dollar, leading to a 1.3% rise in a currency index last week, the best performance since late 2022.

Market experts have shared their perspectives on the situation. Senior equities fund manager Gonzalo Lardies emphasized that the impact may not be significant if the situation does not worsen, while Chief Investment Officer Alfonso Benito predicted potential increases in defense companies, oil, and gas, but declines in airlines. Diego Fernandez, Chief Investment Officer at A&G Banco, expected a lower opening for risk assets and stressed the importance of patience when considering buying opportunities.

As the conflict continues to unfold, investors and analysts are closely monitoring Israel's response and the potential for further Iranian action. The market impact of the situation could extend beyond the Middle East, affecting global inflation and energy prices. In the coming days, stock markets are anticipated to focus on the geopolitical situation rather than central bank actions or the strong US economy. The rally in the markets may stall until there is more clarity on whether the situation between Iran and Israel calms down or escalates further.

Market strategists and economists have varied opinions on the potential impact of the conflict. Some believe that the attack may not drastically affect Fed rate expectations or oil prices, given efforts by Iran and the US to defuse the situation. However, others caution that the key factor lies in Israel's response and subsequent actions by Iran.

As the week begins, investors remain vigilant, monitoring geopolitical developments while considering potential shifts in market sentiment and asset allocation.