Iran conflict fractures global markets as oil surges and bonds stall

Three months into the Iran war, global financial markets have bifurcated into distinct winners and losers as persistently high oil prices reignite inflation concerns and currency volatility. Crude prices have surged approximately 40 per cent, remaining well above $100 a barrel, with early April peaks nearing double their pre-war levels. While a record 400-million-barrel release from strategic reserves and alternative supply sources has partially cushioned the supply shock, the strain on the global energy system continues to mount.

The US dollar has emerged as a primary beneficiary, strengthening by 1.5 per cent against major currencies and outperforming both the Swiss franc and the yen. Investors have embraced the greenback’s safe-haven status, bolstered by rising US Treasury yields. However, some strategists remain cautious about the long-term outlook. Van Luu, global head of solutions strategy at Russell Investments, noted that while the dollar is currently neutral, they still expect a weaker dollar in the medium term once the conflict subsides.

Conversely, Asian economies have borne the brunt of the energy shock, with India’s rupee, Indonesia’s rupiah, and the Philippine peso hitting record lows against the dollar. These nations, which account for a significant portion of oil shipments through the Strait of Hormuz, have seen growth pressured and currencies weakened. Sri Lanka responded with a 100 basis point rate hike, while other countries have tapped foreign exchange reserves. Only China’s yuan has held relatively steady, supported by substantial domestic energy reserves.

Global equities have largely withstood the geopolitical turbulence, driven by renewed optimism surrounding artificial intelligence and hopes for a peace deal. US stocks and South Korea’s Kospi are at record highs, with SK Hynix, Samsung Electronics, and Micron Technology all reaching the $1 trillion market capitalisation milestone. Amazon shares also surged 31.9 per cent in a single month following a fourth-quarter fiscal 2025 earnings beat that reported $213.4 billion in revenue.

Despite the equity resilience, other sectors have struggled. European economic activity contracted at its sharpest rate in over two-and-a-half years in May, according to S&P’s composite purchasing managers index. The S&P 500 passenger airlines index has fallen more than 6 per cent since the conflict began due to global flight disruptions, and a global luxury basket has declined by 10 per cent as investors fear inflation will curb consumer spending.

Government bond yields have risen globally as traders price in potential interest rate hikes to combat energy-driven inflation. US 30-year Treasury yields have risen above 5 per cent, their highest level since 2007, while German Bund yields have hit their highest level in over 15 years. Traders are now pricing in at least two European Central Bank rate hikes by year-end, reflecting the difficulty policymakers face in balancing growth against rising costs.