Markets have absorbed the Iran war without a meltdown, as oil retreats, stocks climb, and the dollar gives back safe-haven gains.
The S&P 500 dropped 3% in the first days of the war but recouped all losses within three weeks. Resilient Q1 earnings and growing expectations of Fed rate cuts later in 2026 propelled the index to new highs, demonstrating markets’ ability to look past the conflict.
After an initial 3% drop, the index quickly recovered as corporate earnings beat forecasts and investors bet on a less aggressive Fed. It now trades above pre-war levels.
A significant disruption to oil transit through the Strait of Hormuz or a direct confrontation between major powers could trigger a sharp risk-off move and weigh on equities.
WTI crude surged to $85/bbl on fears of Strait of Hormuz closures but has since retreated to $72 as supply disruptions failed to materialize. OPEC+ output increases and weakening demand forecasts have also pressured prices.
The feared supply disruption never materialized, and OPEC+ ramped up production to offset any shortfalls, while economic slowdown fears capped demand expectations.
A sustained move above $90/bbl, especially if accompanied by confirmed shipping delays, would indicate that the war is impacting global oil flows again.
Brent crude briefly topped $89/bbl but has fallen back to $76, tracking WTI's move. European refiners secured alternative supplies, and strategic reserve releases added to the bearish pressure.
Brent followed a similar pattern — spike and retreat — though it held a premium due to closer proximity to the conflict zone and higher quality for diesel and jet fuel.
The dollar index jumped to 104.5 on safe-haven buying when war broke out but has retreated to 102.3 as calm returned. Markets now price a more dovish Fed, undermining the dollar.
The dollar initially jumped as a safe haven, but those gains have unwound as markets stabilized, leaving DXY around pre-war levels.
A major escalation that threatens global growth would likely spur renewed demand for dollar-denominated assets, pushing DXY higher.
Gold shot to $2,200/oz at war onset as investors piled into havens, but the rally fizzled below $2,000. Rising real yields and a fading risk premium have undercut bullion, erasing all war gains.
Gold's gain was a knee-jerk safe-haven reaction. Once the war did not expand, investors rotated back into risk assets, and higher bond yields reduced the appeal of non-yielding bullion.
Only if the conflict worsens significantly. Otherwise, it remains vulnerable to rising real rates and a stronger dollar.
The CBOE Volatility Index spiked above 30 when the war began but collapsed to 15 within weeks as initial fears subsided. The rapid decline signals a market that has largely priced out tail risks tied to the conflict.
As the conflict proved contained and economic data remained stable, market uncertainty faded, pushing the volatility index back to complacent levels.
Partially. While immediate tail risks appear priced out, the low VIX could understate dangers of a sudden escalation.
The euro fell to 1.07 on initial risk aversion but has recovered above 1.08. The ECB's steady hand and fading geopolitical angst have allowed the pair to stabilize near pre-war ranges.
The euro’s initial drop was limited and quickly reversed because the war did not directly threaten European energy security, and the ECB stayed on course.
The 10-year Treasury yield plunged from 4.20% to 3.90% as war broke out, but the rally soon reversed on sticky inflation data, pushing yields back to 4.05%. Haven demand proved fleeting.
Initially yes, but it was short-lived as inflation concerns quickly overshadowed geopolitical fears, returning yields to near their starting point.
A century of conflict has passed, yet the financial system remains upright. Oil prices spiked then slumped, equities recouped early losses, and safe-haven flows reversed as the war failed to ignite a systemic crisis. Central banks stayed the course, and corporate earnings held firm, dashing apocalyptic forecasts.
The conflict remained contained, with no major oil supply disruption, no wider regional spillover, and robust global fundamentals. Central banks and governments avoided panic responses, allowing markets to recalibrate quickly.
Crude oil surged, equities sold off, the dollar and gold rallied as investors sought safety. However, these moves proved short-lived as the military situation stabilized and economic data remained resilient.
Not entirely. The risk of escalation, renewed supply disruptions, or an energy price shock persists, particularly if the conflict widens to involve other Gulf states or disrupts Strait of Hormuz traffic.