A look at the day ahead in European and global markets from Tom

Westbrook:

Escalation in the Middle East has rounded out a rough week

for financial markets. Barring a reversal, world stocks

are set to log their sharpest weekly drop since

September and the dollar is at year-to-date highs.

Even before Asian markets turned decisively risk averse on

reports of explosions in Iran, and an Israeli strike, investors

were rattled by disappointing results and hawkish Fedspeak.

Then reports of attacks on Isfahan, Iran, drove gold above

$2,400 an ounce, Brent crude over $90 a barrel and

demand for dollars and yen. Stocks sank and bonds rallied.

The lack of detail on damage in early dispatches had traders

pulling back some of their flight-to-safety moves but the

volatility was hardly comfortable heading into the weekend.

It's unsettling because it dovetails with other negative

developments for markets during the week and has renewed a rally

in commodities that is going to add to inflationary pressure.

Iran is the third-largest OPEC oil producer and pumps 3% of

total world output. Oil is up 16% in 2024. Copper, an industrial

metal, is up 14%.

On Thursday, New York Fed President John Williams gave voice

to a risk for which markets are ill-prepared: "If the data are

telling us that we would need higher interest rates to achieve

our goals, then we would obviously want to do that," he said.

U.S. Treasury yields dropped sharply on Friday but benchmark

10-year yields are up more than 35 basis points for

the month as expectations for rate cuts this year evaporate.

Shares in Taiwanese chipmaking behemoth TSMC slid

6% as it disappointed investors by lowering its outlook for the

sector, dragging down tech and chipmaking shares globally.

Knee-jerk gains for the yen and Swiss franc, particularly on

crosses, show markets are on a hair trigger to unwind carry

trades that can sour quickly in volatile conditions.

Second-tier data due later in the day is likely to be

overshadowed by geopolitics.

Key developments that could influence markets on Friday:

German producer prices

British retail sales

U.S. earnings; American Express, Procter & Gamble

(Editing by Jacqueline Wong)