As the Middle East conflict approaches its eighth week, financial markets are showing contrasting trends. US equities have fully recovered losses incurred since the war’s onset, yet persistently elevated oil prices continue to weigh heavily on government bonds and gold. Emerging markets display significant disparities, with Brazil’s markets surging and China attracting solid inflows, while smaller, energy-dependent economies face difficulties.
Markus Hansen, portfolio manager at Vontobel, noted that while the US can withstand an oil shock of this length, Asian economies are more vulnerable. He has been capitalizing on the market selloff to acquire undervalued stocks but warned that sustained high oil prices could delay central banks’ interest rate reductions.
The US S&P 500 index has bounced back strongly, rallying 9% from its March 30 low to close Monday at 6,886.24, surpassing its February 27 level just before US and Israeli airstrikes began in Iran. The recent ceasefire and prospects for renewed peace talks have bolstered investor confidence. Additionally, Citi has adopted a bullish stance on US equities, anticipating resilient corporate earnings, particularly in the technology sector. This recovery is notable given March’s steep decline, the worst monthly drop since April 2025’s tariff disruptions. The VIX volatility index, often called Wall Street’s “fear gauge,” has returned to pre-war levels after peaking last month. This volatility has benefited brokerage firms, with Goldman Sachs and JPMorgan reporting increased trading income in their first-quarter results.
Despite oil prices retreating from March highs, they remain elevated at around $100 per barrel, approximately 40% above late February levels. Refiners face even higher costs, paying over $140 per barrel for near-term North Sea crude, nearly double the pre-war price. Some investors find reassurance in Brent futures for later delivery, which suggest prices may ease to about $83, though these contracts are still significantly above pre-conflict rates. December and March 2027 futures are both roughly 21% higher than before February 28.
Bond markets tell a different story. Elevated oil prices have pushed borrowing costs higher across the US, Europe, and Japan compared to pre-war levels. Persistent energy price inflation is prompting central banks to maintain a hawkish stance. The US two-year Treasury yield stands near 3.76%, about 40 basis points above late February, though below March peaks. Meanwhile, the UK’s two-year yield has risen approximately 75 basis points. Gold has also suffered, trading nearly 10% below pre-war levels after investors took profits in March, liquidating their best-performing assets to offset losses elsewhere.
The US dollar has largely returned to its pre-war position. The dollar index, which measures the currency against six others, is just above its February 27 close. Initial post-war gains of around 3% have mostly reversed amid growing optimism for a resolution that could mitigate economic fallout. Inflationary pressures have led investors to price in rate hikes in the eurozone and the UK, supporting their currencies. The euro has recovered to about $1.18, regaining nearly all recent losses, while the pound stands at $1.136, matching pre-conflict levels.
Regional market performance varies markedly. Europe, heavily reliant on energy imports, has seen its STOXX 600 index fall 2.6% below pre-war levels, with Germany’s DAX down 5%. Other import-dependent countries like Japan and South Korea have also experienced sharp declines, though they continue to secure fuel supplies despite higher costs. The Philippines, facing severe energy challenges, declared a national emergency and its stock market has dropped 8% since the conflict began. Conversely, Brazil, a major oil exporter, has seen its main equity index rise 5% above pre-war levels, with the real appreciating 2.7% against the dollar. Norway’s crown has also strengthened by over 1% since the conflict started. China, despite being a large oil importer, benefits from substantial reserves and low domestic inflation, attracting inflows into its government bond market and driving down yields. Its green energy stocks have also experienced significant gains.
