Global financial markets sold off this week as developments in the Middle East caught the international community off-guard. The advancement of ISIS insurgents in towns across Iraq and their subsequent taking of the country's second largest city, Mosul, threatened to push Iraq into civil war and put its vast oil reserves in jeopardy. Regional financial markets were hit hard, falling over five percent throughout the Middle East and around 4 percent in Turkey.The speed of ISIS forces in taking over provinces in Iraq was especially alarming, pointing to a melting away of the Iraqi Armed Forces, most of whom appear to have retreated. Having been trained by U.S. Armed Forces and funded by Iraqi's massive oil wealth, the Iraqi Army was expected to have done a better job at containing the relatively smaller and poorer ISIS forces. It appears that the sectarian violence ripe during the initial take-over of Iraq in 2003 by U.S. forces was merely temporarily suppressed and that the ISIS insurgency has gained strength as a result of the neighboring Syrian War. A group that even Al Qaeda has called "extreme," ISIS' success will be catastrophic for Iraq and the region. Financial markets are most sensitive to uncertainty when commodity-rich nations, such as Iraq are involved, however, this crisis has also jumped the border to neighboring Iran. The Shiite lead federal government in Iraq has appealed to the Iranian government (a nation whose population is 90 percent Shiite) to help in combating the self-proclaimed 'Sunni' ISIS faction. Reports out of Baghdad corroborate that the Iranians have sent hundreds of elite Revolutionary Guard troops to aid in the fight against ISIS as they draw closer to the capitol city, Baghdad.Combined, Iran and Iraq have more proven oil reserves than any other country and control over one-fifth of the entire oil in the world. Any military conflict involving these nations will push oil higher and it is already up 6 percent since this crisis began a week ago. A net importer of energy, Turkey is especially sensitive to moves in oil prices and as a result Turkish financial markets have sold-off across the board because of this crisis. The benchmark BIST-100 index is down 4 percent to 77,770 late on Monday, down over three-thousand points from last Monday when it traded at 80,933. Turkish Financial Markets had already risen so quickly in the aftermath of the recent municipal elections that investors were looking for a good time to take profits anyway and the ISIS take-over of Mosul and the subsequent kidnapping of Turkish diplomats at the consulate there appear to have moved investors into risk-off mode. Fixed income markets also sold-off as the benchmark 2-year and long-end 10-year bonds traded down as their yields rose to 8.33 percent and 9.01 percent, up from their levels of 8.13 percent and 8.59 percent respectively from last Monday.Turkish Credit-Default Swaps, a good instrument to insure against political and economic instability, were also up 0.26 percent to 1.88 percent in the last week from 1.62 percent where they had traded last week. The global safe-haven during times of military conflict, the U.S. dollar, was up considerably against the Turkish lira, trading at the higher end of the 2.05-2.15 range the Turkish Government has implied they want to see it stay, trading at 2.14 Turkish liras to the greenback.Apparently, the troubles in neighboring Iraq have not fazed foreign investors as The Central Registry Agency's (MKK) "Foreign Participation in Turkish Equity Markets index" was reported to be 64.22 percent Monday, up 0.08 percent from last week, reaching another high. Foreign investors, according to the MKK are known to have much longer investment horizons and thus may have brushed-off recent developments as temporary, as they may well be.Quarterly unemployment data was released on Monday and surprised investors with a better than expected 9.7 percent unemployment rates down from 10.2 percent for the previous quarter. This good news may have softened the drop in markets Monday as the current ISIS crisis in Iraq is potentially the most serious threat to that country since the U.S. removed Saddam Hussein in 2003.Financial markets also have begun to react to the announcement of the opposition coalition's pick of Ekmeleddin Ihsanoğlu as their candidate to face Prime Minister Recep Tayyip Erdoğan in the first popular election of Turkish President since the founding of the Republic. Although popular among opposition elites, investors find little name-recognition in Ihsanoğlu among voters and too little time for him to make up for it apparently.Turkish Central Bank Chairman Başçı spoke Monday morning echoing previous statements that inflation is working its way through the economy and that it should peak this month. This signals rate cuts to many investors and may be good news for financial markets in the coming days. No major financial data is set to be released the rest of the week and all eyes have been turned to Iraq to see what if any implications this will have for Turkish companies currently investing in the Kurdistan Regional Government in northern Iraq.A quick resolution to the impasse in Iraq will bode well for markets across the region whereas a prolonged conflict will most help Iran as the international community will look to it to fight ISIS with their massive army and ability to put thousands boots on the ground in Iraq expeditiously. Such aid by Iran will ultimately have to be paid back in the form of lifting economic sanctions already crippling that nation.