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

As markets come to terms with the prospect of a long war in the Middle East that may keep oil prices near the $100 per barrel level, the selloff in bonds and stocks has intensified and traders are scrambling to price the stagflation risks.

With the leaders of Iran, Israel and the United States all voicing defiance as the war approaches the two-week mark on Friday, investors are also bracing for more volatility, putting on their risk-off hats and buying U.S. dollars.

The receding hopes of a quick resolution have completely reshaped the global interest rate outlook. Traders are no longer fully pricing even one rate cut from the Federal Reserve this year compared to pricing two rate cuts at the end of February.

For the European Central Bank, money markets fully priced a rate hike by July on Thursday, and a 70% chance of a second increase by December. In contrast, traders in February had attached a roughly 40% chance to a rate cut before year-end.

Amid these shifting rate expectations, a slew of central bank meetings next week will be of prime focus for markets as policymakers get a chance to articulate their views on inflation, rates and growth.

Euro area benchmark Bund yields hit their highest level in almost 2-1/2 years on Thursday, while the rate-sensitive two-year U.S. Treasury yields hit a six-month high.

The only safe haven that has held up since the war began has been the U.S. dollar, gaining over 2% against six major rivals.

Asian investors started their day with a bit of good news as the U.S. issued a 30-day waiver for countries to buy sanctioned Russian oil and petroleum products currently stranded at sea. Oil prices eased and stocks pared some losses on the news.

And while Treasury Secretary Scott Bessent said the move was a step to stabilize global energy markets, the relatively muted reaction underscored the very real inflation worries and bleak investor sentiment across the globe.

U.S. and European stock futures point to a slightly higher open but whether that momentum is sustained remains to be seen.

Key developments that could influence markets on Friday:

* UK GDP * France CPI * Euro zone industrial and manufacturing data