By Ankur Banerjee and Gregor Stuart Hunter April 2 (Reuters) - President Donald Trump's threat to bomb Iran back to the Stone Age has sharply raised stakes in a war now in its fifth week and crushed
Trump's fresh Iran threats give investors a risk-off reality check
Market Reactions and Investor Sentiment Amid Escalating Iran Conflict
By Ankur Banerjee and Gregor Stuart Hunter
April 2 (Reuters) - U.S. President Donald Trump's threat to bomb Iran "back to the Stone Age" has sharply raised stakes in a war now in its fifth week, a setback to investors hoping for a swift end to a conflict that is squeezing oil supplies and fanning inflation.
Global markets recoiled early on Thursday, with stocks and bond prices sliding, oil surging and the dollar firming after Trump gave little clarity on when the conflict might end.
But markets rallied in the U.S. approaching midday on a Bloomberg report that Iran was drafting a protocol with Oman for traffic in the Strait of Hormuz.
Immediate Financial Market Impact
After opening significantly lower, the S&P 500 and the Nasdaq Composite pared losses but remained down, while gold was down 1.4%.
U.S. crude rose 9% to $108.88 after earlier rising by double digits to its highest since March 9, its biggest absolute price rise since 2020.
Uncertainty Over Conflict Duration
Trump said the U.S. military had nearly accomplished its goals in Iran, but that it would continue to hit targets over the next two to three weeks. He did not say how the Strait of Hormuz, a key shipping route blocked by Iran, might be reopened.
"I don't think there was an awful lot in the speech per se, apart from the fact that they're going to keep bombing for the next two to three weeks," said Mike Houlahan, director of Electus Financial Ltd in Auckland.
"That pushes out the resolution timeframe farther," he said. "The next question is because he's extended it, confirmed it's going to take another two to three weeks, does that put added pressure on the fuel supply chain?"
Investor Expectations and Setbacks
BIG LETDOWN FOR INVESTORS
Investors had pinned their hopes on an end to the conflict after comments from Trump earlier in the week, lifting global stocks and pushing the dollar off recent highs. Wednesday's speech, however, underscored the chances of a prolonged war.
Traders who had added risk exposure swiftly exited those positions ahead of a long weekend. Technology stocks, banks and private equity shares were mostly lower, while energy stocks rose along with crude prices.
Oil Supply Disruption and Inflation Concerns
Oil supply disruption and its impact on inflation have been a central concern for financial markets. Trump's comments on Wednesday were unclear on whether U.S. military operations could end even before Iran reopened the Strait of Hormuz.
Iran's chokehold on the vital waterway has triggered what many analysts describe as the worst global energy shock in history. Brent crude was last up more than 8% on the day at around $109 a barrel.
"With no plans to reopen the Strait of Hormuz that he effectively closed, oil prices are to remain high indefinitely," said Matt Simpson, senior market analyst at Stonex in Brisbane, adding markets would soon face "the next round of inflation".
Stagflation Fears and Global Economic Risks
Trump's speech and prospects of prolonged disruption to oil supplies have revived market concerns about stagflation - the mix of high inflation and weak growth that roiled markets in March, analysts said.
Japan could face stagflation risks from the Iran war that would be difficult to address with monetary policy, new Bank of Japan board member Toichiro Asada said on Wednesday.
"The key question in all investors' minds is 'when is this going to be over?' - that is what is creating the volatility," said Russel Chesler, head of investments and capital markets at Vaneck in Sydney.
"We are looking at a situation now where we are getting into a stagflation situation with lower growth and higher inflation expectations."
Safe-Haven Flows and Currency Movements
Volatility in Treasuries and the Dollar
U.S. Treasury yields fell on Thursday after earlier rising on concerns higher inflation would shut the door on easier monetary policy. The yield on the 10-year Treasury was 4.30%, down 3 basis points.
Markets are expected to remain volatile as investors track developments over the next two to three weeks. Analysts expect the dollar and oil prices to rise in the near term as investors shift into risk-off mode.
Wall Street's fear gauge, the CBOE Volatility Index of expected stock moves, rose 2.6% to 25 after earlier hitting 27.
The dollar, which has benefited from a rush to safe-haven assets since the conflict began in late February, advanced against other major currencies, reversing two days of losses. It rose about 1.6% in the first quarter, its biggest quarterly gain since late 2024.
"The dollar has already edged a little bit higher ... and I think given our expectations for the war to extend into at least June, the dollar can definitely increase further," said Carol Kong, currency strategist at Commonwealth Bank of Australia.
"It's hard to feel optimistic about the end of the war for sure, because ultimately Israel and Iran are the two other parties to the war; it's not just the U.S."
(Reporting by Ankur Banerjee, Jiaxing Li, Scott Murdoch and Gregor Stuart Hunter. Additional reporting by Dhara Ranasinghe. Writing by Sumeet Chatterjee; Editing by Mark Potter, Colin Barr and Arun Koyyur)
