Israel began the operation with a surprise attack on Friday that wiped out the top echelon of Iran's military command and damaged its nuclear sites. The move occurred after the main United Nations watchdog declared for the first time in 20 years that Iran was in breach of its non-proliferation obligations.
Iran has vowed to "open the gates of hell" in retaliation.
The attacks from both sides were far more extensive than the more limited exchanges between the two in recent years, but oil production and export facilities have largely been unaffected so far.
Oil prices fell back after jumping about 7% to 4-month peaks on Friday, with U.S. crude slipping to $72.40 per barrel from last week high of $77.62. Gold also retreated, having failed to breach April's record last week.
U.S. Treasury yields held Friday's gains, but remain largely stuck in recent ranges as the Federal Reserve meets this week and prepares to release its quarterly economic forecasts. A 20-year bond auction will occur later today.
Wall Street stock futures recovered some of Friday's losses ahead of today's bell, and stocks in Asia and Europe rallied. Middle East bourses, however, continue to fall.
Even as oil analysts and brokers put forward $100-plus forecasts on 'worst case' scenarios, crude remains down 8% year-on-year and still subdued historically, a critical factor for investors focused on the inflationary impact of any new oil shock.
The last time crude topped $100 per barrel was in the wake of Russia's invasion of Ukraine in 2022, but it sustained those heights for less than four months. Prior to that, you have to go back over a decade to see crude hit triple digits.
A key question is whether the conflict will lead to disruptions in the Strait of Hormuz. About a fifth of the world's total oil consumption, or some 18 to 19 million barrels per day of oil, condensate and fuel, passes through the strait.
The dangers of further escalation looms over a meeting of the Group of Seven leaders in Canada, with U.S. President Donald Trump expressing hope on Sunday that a deal could be done. But there is no sign of the fighting abating as we enter the fourth day of war.
As an indication of how far the situation could spiral, two U.S. officials told Reuters that Trump had vetoed an Israeli plan to kill Iran's Supreme Leader Ayatollah Ali Khamenei.
While the G7 talks will likely center on the Middle East conflict, leaders will also discuss lowering the Russian oil cap, with European nations and some others expected to go ahead with the move and further sanctions on Moscow even if Trump objects.
Beyond geopolitics, it's a week jammed with central bank meetings.
There is the Fed, of course, which is not expected to move rates lower until September.
The Bank of Japan started its two-day policy meeting today. The trade and geopolitical uncertainties are widely expected to keep the BOJ on hold too.
Likewise, the Bank of England is expected to stand pat until August.
Perhaps the most notable central bank meeting of this week will involve the Swiss National Bank, which is widely expected to move policy rates back to zero. The likelihood of a cut into negative territory has also risen amid fresh franc strength and domestic price deflation. The franc flirted with its strongest level in more than 10 years against the dollar last week, but held steady on Monday.
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