Financial markets are experiencing significant turbulence as the ongoing Middle East war enters its second week, with oil prices jumping more than 20% and the dollar strengthening. Despite the volatility, market experts say traditional crisis indicators haven’t reached panic levels, suggesting investors still believe the conflict may be resolved soon.
Financial markets worldwide are grappling with uncertainty as the Middle East conflict continues into its second week, creating unprecedented challenges for economic forecasting and monetary policy decisions.
The U.S. dollar has become investors’ preferred safe haven during this period of unrest, posting its best weekly gains since late 2024 with a 1.7% increase. Meanwhile, rising energy costs are sparking concerns about a repeat of the 2022 energy crisis, though market analysts note the absence of widespread panic seen in previous global crises.
Key market stress indicators remain relatively stable, including corporate bond spreads and the VIX volatility measure, suggesting many investors continue to trust President Donald Trump’s promise of a swift resolution to the conflict.
The recent Bank of America survey revealed that half of global fund managers considered gold ownership the most popular investment strategy, with the precious metal climbing 70% over the past year. Technology stocks and emerging market investments also attracted heavy investment flows before the current selloff.
These previously popular assets have taken significant hits this week, alongside bonds experiencing their worst weekly decline in over a year as inflation concerns mount and interest rate projections shift dramatically.
Kit Juckes, who leads foreign exchange strategy at Societe Generale, emphasized that current market conditions aren’t creating systemic risks. “There’s nothing that gums up the works of the system,” Juckes explained.
“There’s just a geopolitical shock that, for the sake of argument, has sent the dollar up, stocks down, and boosted some volatility and sent oil prices up very quickly,” he added.
Market volatility measures have increased but remain well below crisis levels. The VIX equity volatility index sits above 20 after its largest weekly jump since November, far from the record 60 reached during Trump’s “Liberation Day” events last April.
Bond market volatility, measured by the ICE BofA MOVE index, has reached its highest point since November at 75, though still below April’s peak around 140. Currency fluctuations have also intensified but less dramatically than during January’s Greenland annexation threats.
Energy markets represent the primary source of current market stress, with oil prices surging over 20% in one week – the largest weekly increase in four years.
Nicolas Forest, chief investment officer at Candriam, offered perspective on historical conflict impacts: “When you look at past crises, we can see that generally the impact of past conflicts are relatively neutral for equities. We can see some shock, but after three months, six months, it’s relatively manageable.”
However, Forest warned about oil reaching $100 per barrel: “That’s another story.”
The potential energy crisis compounds existing market vulnerabilities that financial regulators have highlighted recently, including excessive hedge fund borrowing in government bond markets, possible artificial intelligence investment bubbles, and growing risks in private credit markets.
Kevin Thozet from Carmignac has long argued that markets underestimate sustained inflation risks, particularly given resilient global economic growth. He advocates for inflation-protected bonds over traditional government securities.
“Even with oil nearing $90 a barrel, people are still underappreciating the risk of inflation over the medium term,” Thozet stated.
With numerous uncertainties surrounding interest rates and long-term economic impacts, investors are gravitating toward familiar strategies.
Dan Izzo, founder of hedge fund BLKBRD, described the current investment dilemma: “People are struggling to understand the answer of, ‘what do I buy?’”
“Earlier this year and before the war in Iran, people were firmly rooted in buying assets in the rest of the world, certainly as AI and credit-related U.S. risks have emerged,” Izzo noted.
“The war has shifted this thinking,” he concluded.
