Global financial markets are experiencing significant turmoil due to the war in Iran, leading to reduced trading activity and increased costs. According to reports from The Economic Times, the war has triggered widespread financial market chaos, making trading harder and costlier as investors and market makers shy away from risk. Various measures of volatility have soared to levels seen in previous market crises, including those for stocks, bonds, oil and gold. The difference between bid and ask prices on newly issued two-year U.S. Treasuries has meanwhile widened roughly 27% in March compared with February levels, suggesting dealers are charging a higher premium to take on risk. As Vantage Global Prime senior market analyst Hebe Chen noted, markets spent a month pricing a short, contained conflict, but that wishful optimism has now broken with the Houthis' entry over the weekend, rewriting the playbook from this week as prolonged war risk becomes increasingly credible.
In Europe, the pain has been particularly stark in the futures market for short-term interest rates, where traders rapidly priced steep central bank rate hikes. As reported by The Economic Times, liquidity became 'severely diminished' at one point, operating at 10% of usual levels. Morgan Stanley's co-head of EMEA rates Daniel Aksan noted that the volatility reminded him of the COVID days. Hedge funds, which now make up over 50% of trading volumes in Britain's and euro zone government bond markets according to Tradeweb data from 2025, took steep losses on betting the BoE would cut rates and on trades that assumed the gap between Italian and German bond yields would stay narrow. The latest market stress has been particularly evident in equity markets, with the S&P 500 dropping 3.4% over Thursday and Friday - its biggest two-day decline in a year, leaving the benchmark more than 8% below its January record.
The latest symptoms of market stress have arrived at a time when markets had been in an expansive mood, as investors rode a runaway rally across asset classes. According to The Economic Times, trading has thus far remained orderly, but buyers are becoming increasingly scarce as investors rush to de-risk and move into cash. Tom di Galoma, managing director of global rates trading at broker-dealer Mischler Financial, noted that firms have lost so much money that liquidity is suffering because you don't have the players. The latest bond market developments show 10-year Treasury yields falling four basis points to 4.39%, with some Wall Street bond-fund managers saying markets are underestimating the risk that the US war in Iran will cause a sharp slowdown in an already sputtering economy. Goldman Sachs Group Inc. has raised the probability of a downturn over the next 12 months to about 30%, while Pimco sees a more than one-third chance of recession.
Investors say they have at times struggled to get prices or execute trades over the past four weeks, as market makers fear being stuck with large positions that could quickly become unprofitable. As reported by The Economic Times, Rajeev De Mello, chief investment officer at GAMA Asset Management, noted that when they try to trade, it takes longer to trade and market makers want them to be more patient, cut the trades into smaller sizes. The price of normally safe-haven gold plunged this month after a record rally in 2025, with market makers sometimes absent altogether, indicating an unwillingness to transact. The cost to insure Asian investment-grade debt has widened by about two basis points Monday to roughly 94 basis points, a level last seen in May 2025, according to credit traders. RBC Global Asset Management reports that so far, the highest volatility has been observed in fixed income markets which have focused on the inflationary impact of the conflict.
Oil markets have experienced dramatic volatility as Iran-backed Houthi forces entered the Middle East conflict and an expanded US military presence raised concerns about prolonged confrontation. According to recent reports, Brent crude advanced 2.3% to trade above $115 a barrel, bringing year-to-date gains to about 90% as the conflict broadened in its fifth week. Macquarie Group Ltd. warned that oil may hit a record $200 a barrel if the Iran war drags on until June, with the Strait of Hormuz staying shut, while analysts including Vikas Dwivedi outlined a scenario with 40% probability of historically high real prices. The aluminum market has also been affected, with prices climbing as much as 6% after Iran attacked two production sites in the Middle East, raising prospects of record prices for the metal. Economists have started to dial back growth forecasts and nudge up recession odds as higher energy prices, rising borrowing costs and the stock-market slump begin to squeeze businesses and consumers.
