Saudi Arabia announced Wednesday that its air defense systems intercepted and destroyed a Houthi drone before it could breach Mecca’s airspace, marking the first time the holy city has been directly threatened during the ongoing conflict. The Iran-aligned Houthi movement dismissed the accusation as “a worn-out lie,” according to their spokesperson.

Turki al-Malki, spokesman for the Saudi-led coalition that has fought the Houthis since 2015, characterized the attempted strike as “a deliberate act intended to provoke the feelings of millions of Muslims,” declaring the holy city’s security a “red line.” Mecca serves as Islam’s most sacred site and the destination for the annual Hajj pilgrimage.

The Houthis rejected the Saudi account, with spokesperson Hazem al-Assad stating: “The claims about targeting Mecca are a worn-out lie that has been used before and no longer fools anyone.”

The Organization of Islamic Cooperation condemned the attempted strike as “heinous,” denouncing what it described as Houthi aggression against Mecca, the Madinah region, and Saudi Arabia more broadly.

Saudi authorities issued a security alert for Mecca on Tuesday — the first since the Houthis last attempted to target the sacred area with a ballistic missile in 2017 — following days of intensified attacks that have pulled Saudi Arabia deeper into the regional conflict.

The incident represents the latest escalation in the Yemen conflict, testing a month-old defense agreement among Saudi Arabia, Turkey, and Pakistan, while adding a new flashpoint to a Middle East already destabilized by U.S.-Iran tensions.

A United Nations-brokered truce in April 2022 had largely halted Houthi attacks on Saudi territory, but hostilities have resumed since the group declared a blockade on Saudi shipping in July and seized control of strategic positions along the country’s Bab al-Mandeb coastline.

In early September, the Iran-aligned group launched missiles and drones at multiple sites across Saudi Arabia, marking a significant escalation. Riyadh has accused the Houthi rebels of targeting civilian and economic infrastructure in the kingdom.

Saudi Arabia has also blamed an Iran-backed militia based in Iraq for Friday’s attack that disabled the East-West Pipeline, one of the kingdom’s most critical oil arteries crossing the Arabian desert, putting 4 million barrels per day at risk and triggering a sharp spike in crude prices.

The widening conflict has further rattled oil markets already on edge over constrained Gulf shipping routes, from a shuttered Saudi pipeline to fluctuations in Strait of Hormuz traffic.

Oil prices have climbed alongside the escalation, even as Hormuz flows have shown recovery. While oil traded lower Wednesday, Brent crude and U.S. West Texas Intermediate futures hovered near four-month highs of $107.8 per barrel and $104.6 a barrel, respectively.

The seven-day average of oil transit through the Hormuz Strait rose to nearly 12 million barrels per day as of Sunday — “easily the fastest pace since the post-MOU June-July breakout,” according to oil market analyst Rory Johnston, founder of research firm Commodity Context.

“This time there’s virtually no Iranian crude,” he noted. Still, that volume remains below 60% of pre-war levels, Johnston added, underscoring the room shipping through the strait has left to recover as the Yemen fighting and pipeline outage add fresh risk to an already-strained supply picture.

Surging oil prices and bond yields have made markets choppy in recent weeks — but many investors are digging ing and hoping returns are in sight.

Global government bonds extended a sell-off after the U.S. 10-year Treasury

Equities have largely been on a tear this year despite a global energy crisis, surging bond yields and bouts of volatile trade amid geopolitical developments, with the S&P 500

As stocks faced more volatility this week after leading AI voices warned the tech was moving too fast to be safe and safeguards were needed, Bank of America’s latest Global Fund Manager Survey revealed on Tuesday that many market participants appear undeterred from pouring cash into the stock market.

The survey found that while the “excess bullishness” seen over the summer had faded, investors remained broadly optimistic about growth and earnings, with most expecting continued heavy spending on AI.

A net 49% of money managers remained overweight global equities in September, the survey said, which polled 170 investors overseeing a collective $470 billion in assets. That marked a slight pullback from the previous month, but stocks remained the most common overweight position of any asset class.

Expectations for double-digit earnings-per-share growth over the next 12 months were at their highest since August 2021, the survey found, and 38% of respondents said they expected a global economic “boom” in the coming year.

Allocation to bonds was at its lowest level since May 2022.

Why BlackRock is still bullish on stocks

In a note on Tuesday, strategists at the BlackRock Investment Institute (BII) said that rising bond yields hadn’t knocked them off of their pro-risk stance, though they are “raising the hurdle for returns.”

“Higher rates and strong equities need not be contradictory – what drives yields matters,” they said. “When higher yields reflect stronger investment and growth, the resulting earnings strength can help offset a higher cost of capital. That explains why we maintain our U.S. equity and AI overweights.”

“We think AI-related investment can support growth and profits even as the same investment boom absorbs capital, power and other scarce resources,” they added.

Toni Meadows, head of investment at BRI Wealth Management, told CNBC in an email on Tuesday that the “gold rush” mentality around AI meant there would be periods where investors “question which future they are investing for.”

“The pace of investment in AI data centres and related infrastructure is insatiable at present but there will be bottlenecks and the circular nature of some revenue streams within the sector ultimately opens ‘the AI trade’ up to some fragility,” he said.

“At present, I doubt the current questions being raised will derail the story, even if we now have a period of reflection and readjustment. We are likely to have a series of pauses in the AI trade – whether they develop into a deeper sell-off depends on how worried investors become about the returns to investment, the funding of spending and the circular nature of revenues in some areas.”

Tej Sthankiya, senior investment analyst for impact investing at Federated Hermes, told CNBC that the recent AI sell-off created buying opportunities for longer-term investors.

“It is difficult to predict how long this [volatility] will go on for as the market’s short term risk appetite is heavily influenced by the top-down macro (e.g. rates, oil, geopolitics), where trends have been less benign in recent days and weeks,” he said in an email.

“The AI data center build out has been capacity constrained by access to critical semiconductor wafers and power; there are no signs of these bottlenecks abating in the near term,” he said.

Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a Tuesday morning note that the key question for investors is not whether frontier development slows, but whether AI demand and monetization will continue to expand.

“We believe the answer is still yes,” he said. “We continue to favor a diversified approach across the AI value chain, combining infrastructure beneficiaries (including semiconductors, networking, power, and cloud) with larger platforms and software companies positioned to monetize adoption.”

“Stronger AI safeguards may reshape competition, but the proposals so far do not establish that the AI capex cycle is ending,” Haefele added.

Oil retreated Wednesday after a report said U.S. energy inventories rose last week, with investors assessing the latest developments in Middle East conflict and associated supply risks.

Futures for international benchmark Brent crude for November delivery dropped 1.02% to $107.64 a barrel. U.S. West Texas Intermediate futures for October declined 1.29% to $104.46 per barrel.

U.S. crude oil, gasoline and distillate inventories all rose last week, Reuters reported, citing sources for data from the American Petroleum Institute. Crude inventories rose by 7.1 million barrels in the week ended Sept. 11, compared with analysts’ expectations for a draw of about 1.6 million barrels, Reuters reported.

Meanwhile, traders remain glued to developments in the Middle East, amid concerns over supply disruptions following an attack by Iran on Saudi Arabia’s crucial East-West pipeline that led to its closure over the weekend.

U.S. Energy Secretary Chris Wright told CNBC in an interview on Tuesday that the closure was a brief interruption that will last days. Andy Lipow, president of Lipow Oil Associates, said in a note on Monday that “judging from the on-line pictures, it will take months to repair.”

The financial cost of the Middle East conflict is also being closely watched. According to a report released Tuesday by the nonpartisan Congressional Budget Office, the U.S. war with Iran has cost the Pentagon an estimated $38.1 billion through Aug. 1 and could lead to another $2 billion to $3 billion being spent for each additional month of fighting.

“Looking ahead, crude is likely to remain closely tied to security conditions along Gulf export routes and the pace of repairs to Saudi infrastructure,” said Joseph Dahrieh, managing director at brokerage Tickmill.

“Any further disruption to maritime flows or a prolonged pipeline outage could tighten the physical market and extend the advance in prices,” Dahrieh added.