Financial markets began the week on a nervous footing as the world waited for the next move in the unfolding crisis in the Middle East.

Analysts signalled that dangers persist for the global outlook following Iran’s direct assault on Israel at the weekend, despite a relatively calm opening to markets on Monday. Iran retaliated to the attack on its embassy in Damascus, Syria, which resulted in the death of a senior commander, by launching a drone and ballistic missile assault on Israel, though the threat was largely dealt with by Israeli defences and allies.

Israel has not admitted responsibility for the Damascus attack and the world is waiting to see how it will respond to the attack by Iran, as allies urged caution and a need to de-escalate the crisis.

The FTSE lost a modest amount ground in a relatively calm opening yesterday, regaining some ground as the session progressed after falling in early trading, while Brent Crude gave up some of the gains made on Friday. In mid-afternoon trading, Brent crude for June delivery was $89.72, down from $90.45 at Friday’s close.

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In the US, futures tied to the Dow Jones Industrial Average, S&P 500 and Nasdaq-100 made gains following last week’s sell-offs, boosted by strong results from investment bank Goldman Sachs.

But while financial markets appeared to be taking events in the Middle East in their stride, there were concerns that dangers still lie ahead.

Nigel Green, chief executive of investment advisor deVere Group, warned a “slight relief rally” on Monday does not mean investors can “sit back and relax”.

He said: “There seems to be an element of a slight relief rally because, so far at least, Israel’s [Prime Minister Benjamin] Netanyahu appears to be following US President Joe Biden’s instruction not to retaliate and risk escalating the situation even further.

“However, the situation remains highly volatile and investors who are serious about protecting and growing their capital cannot now just sit back and relax.”

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Susannah Streeter, head of money and markets at stockbroker Hargreaves Lansdown, said the week started on a “fraught note, with unease still clouding sentiment”.

Ms Streeter said: “Investors are on alert for retaliatory action following Iran’s attack on Israel. Fears are brewing that a dangerous new episode of escalating conflict is about to roll. All eyes are on diplomatic efforts being made to diffuse the situation which have helped bring down a spike in oil prices.

“The FTSE 100 has been on the back foot in early trade, retreating away from record levels which the index flirted with on Friday. Although defence company BAE Systems has gained fresh ground amid expectations of higher military spending, energy stocks are on the back foot, as oil prices have retreated a little.

“Concerns have also deepened about stubborn inflation in the United States, following a rebound in the headline CPI (consumer price index) rate in March. There’s now a big rethink taking place about when the Fed will be confident enough to cut interest rates, with more hopes sliding away from a June date and September being increasingly pencilled in instead. US retail sales figures out later today [Monday] will be watched closely for signs of continued consumer resilience.”

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Russ Mould, investment director at AJ Bell, said: “Oil prices had risen in anticipation of Iran’s action but have fallen back, though gold prices remain near-record highs which hints at continuing nervousness among investors. The situation remains fraught and, beyond the geopolitical and humanitarian implications, a more widespread conflict in the Middle East could see energy prices surge and unpick central banks’ careful efforts to bring down inflation.

“For now, the FTSE 100 remains within reach of its record high.”

Meanwhile, gold continues to be in high demand among investors, amid the continuing global unrest. The price of gold, which reached a record high last week, was fixed yesterday afternoon at $2,353.68 an ounce, compared with $2,397.12 at the previous close.

The FTSE-100 index at 3:45pm was down 20.78 at 7,974.80.