The attention of the markets is focused on the developments in the Middle East, particularly on the oil market, as Brent crude oil surged again above $90 per barrel after Iran vowed to retaliate for the deadly air strike on its embassy in Syria on April 1, for which it blamed Israel.

Analysts believe that if further escalation of tension in the Middle East occurs, oil could move towards $100 per barrel. Concurrently, stocks are expected to continue facing strong pressures after the S&P 500 recorded its worst fall since October last week.

The risk of an immediate Iranian attack on Israel had already been at least partially priced in, with Brent crude having risen by 3.5% so far this month, surpassing $90 per barrel for the first time since October. The reaction of oil to previous attacks against shipping around the coasts of Yemen was subdued, as those attacks did not directly target energy cargoes. Now, with the escalation by Iran, traders will focus more on the flows through the Strait of Hormuz, a key outlet for about one-fifth of the world's oil. Tension regarding potential disruptions could add to the oil risk premium in case of any attacks on tankers.

Traders can expect a spike in oil prices at the opening of Monday before prices stabilize. The reaction of oil will likely be restrained following Iran's statement that it considers the retaliation for the embassy attack to be concluded and if the US refusal to support direct Israeli retaliation prevents further escalation.

The immediate reaction of stocks to such events is usually "sell now," stated Mark Taylor, director of the British brokerage Panmure Gordon, to Thyagaraju Adinarayan of Bloomberg News late Saturday. US government bonds found support from their safe-haven status on Friday but may struggle if the rise in crude reignites inflation fears. Gold, the dollar, and the yen tend to gain when geopolitical tensions are high.

The trading of Middle East stocks on Sunday will be the next test of investor sentiment. Markets will not like the unprecedented nature of the Iran attack, although it may find some basis from its announcement that “the matter may be considered concluded.” The biggest drop in Bitcoin in more than a year on Saturday provided an initial picture. If the risk-off mentality persists, oil will push towards $100 per barrel.

"Iran designed its retaliation to cause maximum symbolism but minimal damage. By itself, it should not move the markets. But if it triggers an Israeli counter-reaction, then we are headed to a very dangerous place. The key to what happens next is whether the US can restrain the Israeli reaction," comments Ziad Daoud, chief economist of emerging markets for Bloomberg Economics.