Bank of America’s strategist Michael Hartnett has flagged heightened downside risks for European and Japanese stock markets due to escalating global conflict, citing potential disruptions to energy supplies and defense sector volatility. The outlook underscores growing market anxiety as geopolitical flashpoints threaten economic stability.
- EUROSTOXX 50 shows weakening momentum amid rising geopolitical risk
- N225 faces heightened exposure due to energy import dependence and regional instability
- CL=F crude oil futures up 8.3% in two weeks on supply concerns
- VIX index reached 24.7, signaling elevated market fear
- Defense stocks rose 12% in European and Japanese markets over the past month
- Short-term outflows from European and Japanese equities totaled $4.2 billion in Q1 2026
The warning comes as global equity indices face renewed pressure, with the EUROSTOXX 50 index showing signs of weakening momentum amid rising uncertainty. Hartnett highlighted that European equities, traditionally seen as stable, are now vulnerable to shocks from regional conflicts, particularly those affecting energy transit routes and supply chains. Japan’s N225 index also faces headwinds, as the country’s reliance on imported energy and regional security dynamics amplify risk exposure. Key indicators reflect the mounting stress: crude oil futures (CL=F) have surged 8.3% over the past two weeks, signaling market concerns over supply chain integrity. The VIX index, a benchmark for equity market volatility, climbed to 24.7 — its highest level since late 2023 — indicating increased fear among investors. Defense stocks across both regions have seen a 12% average rise in valuation over the same period, suggesting anticipation of escalating military spending. The shift in sentiment is particularly impactful for financial markets tied to energy and defense sectors. European financials, which have historically benefited from stable macro conditions, now face earnings downgrades due to higher financing costs and capital reallocation toward security infrastructure. Japanese industrial firms, especially those in automotive and electronics, are exposed to both supply chain disruptions and currency volatility, with the yen weakening 6.4% against the dollar since January. Investors are repositioning portfolios, with short-term outflows from European and Japanese equities totaling $4.2 billion in the first quarter of 2026. The repricing of risk is evident across asset classes, as bonds and safe-haven currencies gain favor amid growing war-related uncertainty.