Investors piled into low-risk assets such as government debt and traditionally safe haven currencies following the downing of a Russian military aircraft by Turkish warplanes earlier today.
It's still unclear exactly how significant the incident could be, although Russian President Vladimir Putin has condemned it as a "stab in the back", claiming it showed Turkey's support for terrorists.
Turkey, a Nato member, claims the plane entered its territory and gave the pilots plenty of warning before shooting it down: Russia claims the plane never left Syria's airspace. An emergency Nato meeting has been called.
While the politicians are still establishing their next moves, investors have already made theirs.
The dollar fell against the Japanese yen and the Swiss Franc, helping push oil and metal prices higher.
Yields on 10-year US Treasuries fell to a three-week low at 2.21 per cent, and two-year German yields slipped below 0.4 per cent for the first time.
At the same time, investors moved their money out of Turkey and Russia, in anticipation of increased tension.
"Investors are naturally demanding a higher premium to match the country risk," Ipek Ozkardeskaya, a market analyst at London Capital Group, said.
Turkey's main stock exchange, Borsa İstanbul, fell 3.88 per cent to 76,653.81 points in mid-afternoon trade. Meanwhile, the lira shed one per cent against the dollar to $0.35.
Russia's Micex index fell 3.24 per cent to 1,807.62 points, while the rouble lost 0.2 percent against the dollar.