Middle Eastern financial markets opened the week under heavy pressure as the escalating conflict between the United States and Iran reverberated across the region. Saudi Arabia’s benchmark index fell 2.2% in its sharpest daily drop since April, while Egypt’s main equity gauge slid 2.5%, extending a month-long decline to more than 8%. The moves mark some of the first direct market reactions to the intensifying geopolitical shock, underscoring how quickly military developments are translating into capital market stress.

Saudi Arabia: Oil Shield Softens the Blow

The Saudi Tadawul All Share Index reversed its year-to-date gains, weighed down by broad-based selling across banking, real estate, and consumer stocks. However, losses were partially cushioned by gains in Saudi Aramco, which rose 3.4% on expectations that crude prices could surge when global markets reopen.

Aramco’s heavy weighting — roughly 16% of the index — helped prevent a deeper slide. This dynamic highlights a structural advantage for the Saudi market: higher oil prices can offset regional instability by strengthening fiscal revenues and corporate earnings in the energy sector. For investors, the kingdom’s oil leverage acts as a partial hedge against geopolitical turbulence.

Still, sustained volatility in oil prices could introduce inflationary spillovers globally, particularly for energy-importing nations, raising broader macro risks beyond the Gulf.

Egypt: Currency Pressure and Energy Risks Intensify

Egypt’s equity slump reflects deeper structural vulnerabilities. The Egyptian pound weakened to around 48.8 per dollar, its lowest level since mid-2025, placing it among the world’s worst-performing currencies last week. The country has already been grappling with reduced Suez Canal revenues, a key source of foreign currency, as shipping traffic diverted away from the Red Sea amid regional attacks.

The situation worsened after Israel halted natural gas supplies to Egypt following coordinated strikes on Iran. Previously receiving approximately 1 billion cubic feet of gas per day, Cairo is now scrambling to secure additional liquefied natural gas cargoes ahead of peak summer demand.

For a country that secured a $57 billion international bailout in 2024 amid mounting fiscal strain, renewed energy supply disruptions and shipping slowdowns represent significant external shocks. Even as Egypt is geographically removed from Iran, its economic interconnectedness leaves it exposed to regional instability.

Regional Spillovers and Investor Sentiment

Omani and Bahraini equities also declined, while Kuwait temporarily halted trading as a precautionary measure. Although Israel’s market was closed due to its Monday-Friday trading schedule, the broader regional tone reflects rising risk aversion.

The suspension of Suez Canal transit by major shipping firms, including France-based CMA CGM, adds another layer of uncertainty. Any prolonged disruption to this critical trade route would strain supply chains and further pressure Egypt’s balance of payments.

Looking ahead, markets will closely monitor oil price behavior, currency stability, and the duration of energy supply interruptions. For Gulf producers, elevated crude prices could provide a fiscal cushion. For import-dependent economies like Egypt, however, prolonged conflict risks amplifying currency weakness, inflation, and capital outflows. The coming weeks may determine whether this is a temporary volatility spike or the beginning of a more prolonged regional repricing.