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Escalating tensions between the U.S. and Iran sent stocks lower and spurred demand for haven assets including gold, the yen and Treasuries. Oil surged.

The S&P 500 Index headed for its biggest drop in a month after a U.S. airstrike in Baghdad killed a top Iranian commander and the Middle Eastern country’s leader threatened “severe retaliation.” The VIX Index, a measure of equity volatility, jumped the most on a closing basis since August. The Stoxx Europe 600 Index also slid. Energy companies bucked the retreat after West Texas oil at one point rallied almost 5%.

“The market’s recently diminished trade-war concerns have erupted overnight into the fear that a real war will take place,” said Chris Rupkey, chief financial economist at MUFG.

The yen strengthened, gold hit the highest in four months and the yield on 10-year Treasuries looked poised for the biggest drop in three weeks as government bonds rallied. The euro weakened and the DAX Index led regional stock declines amid conflicting signals from German economic data.

The developments in the Middle East derailed a bullish mood that pushed the S&P 500 Index to a record high Thursday after a blockbuster 2019. Traders had returned from holidays to the news that China’s central bank had moved to support the economy and President Donald Trump expected to sign the first phase of a trade deal with the Asian nation on Jan. 15. Beijing has yet to confirm the date.

The flare-up could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” said Valentin Marinov, the London-based head of G-10 currency research at Credit Agricole SA.

Most shares in Asia slumped, though equities in Japan didn’t trade because of a holiday. A gauge of developing-nation stocks joined the sell-off, though equity markets in the Middle East are largely closed for the weekend.

Here are some events to watch for this week:

  • Federal Open Market Committee minutes will be released on Friday.
  • U.S. ISM manufacturing is also due. The Institute for Supply Management’s PMI is forecast to show a contraction for a fifth month.

These are the moves in major markets:

Stocks

  • The S&P 500 Index sank 0.6% as of 9:43 a.m. New York time.
  • The Stoxx Europe 600 Index decreased 0.4%.
  • The MSCI Asia Pacific Index fell 0.1%.

Currencies

  • The Bloomberg Dollar Spot Index climbed 0.1%.
  • The euro decreased 0.2% to $1.115.
  • The British pound dipped 0.5% to $1.3078.
  • The Japanese yen gained 0.4% to 108.17 per dollar.

Bonds

  • The yield on 10-year Treasuries fell five basis points to 1.83%.
  • Germany’s 10-year yield dipped six basis points to -0.28%.
  • Britain’s 10-year yield dipped five basis points to 0.74%.

Commodities

  • West Texas Intermediate crude increased 3.4% to $63.24 a barrel.
  • Gold rose 1.1% to $1,545.97 an ounce.

With assistance from Gregor Stuart Hunter, Alexander Kwiatkowski, Joanna Ossinger, Adam Haigh, Anooja Debnath and Sam Potter.

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