Global equity benchmarks closed sharply lower on Monday as investors moved from the initial shock pricing of Sunday’s events to base cases that assumed a prolonged conflict involving Iran, with cyclical sectors leading the declines.

European and U.S. indices each posted losses, with selling concentrated in airlines, consumer discretionary, and industrial names exposed to global supply chains. Defensive sectors including utilities and consumer staples outperformed but did not avoid losses. Energy producers were among the few sectors that closed higher.

Volatility indices spiked to their highest levels in months, with options markets pricing in elevated risk over the coming weeks. Demand for downside protection on equity indices was unusually strong, while skews on currency and rates volatility also steepened.

Government bond markets saw a classic flight-to-quality bid, with yields on benchmark U.S. Treasuries, German bunds, and Japanese government bonds moving lower. Curve dynamics reflected investor expectations that central banks would tilt cautious in their reaction to any inflation impulse from higher energy prices.

Credit markets reopened on a defensive tone. Investment-grade spreads widened modestly, while high-yield spreads — particularly in sectors exposed to commodity costs and to discretionary consumer demand — moved meaningfully wider. New-issue calendars for the week were reported to be on hold pending clearer market conditions.

Foreign exchange action reflected the same defensive themes. The U.S. dollar, Swiss franc, and Japanese yen drew bids, while emerging-market currencies broadly weakened. Currencies of large oil importers underperformed, with traders pointing to deteriorating terms-of-trade and current-account dynamics.

Commodity markets remained focused on energy. Crude prices held the bulk of Sunday’s gains, while refined products, particularly distillates, outperformed as traders weighed potential refinery disruptions and shifts in product flows. Industrial metals were mixed, with safe-haven gold extending gains.

Equity analysts began publishing sector-by-sector frameworks for assessing the impact of higher energy costs and reduced consumer confidence on full-year earnings. Several major banks revised their global growth forecasts modestly lower for the year, citing the conflict and its likely effect on trade and travel.

Trading desks said attention would now shift to second-order effects, including the response of monetary policymakers, the durability of consumer spending in major economies, and the potential for supply-chain disruption to compound the energy shock. Asian markets were expected to take their cue from these themes when trading reopened.