Investors reassessing the potential for deeper economic pain from the war in Iran are selling assets across the globe, from government bonds to stocks and gold, reigniting fears that markets may become vulnerable to a bigger dislocation.
Oil prices jumped to as high as $119 a barrel on Thursday as Iran attacked energy facilities across the Middle East following Israel’s strike on its South Pars gas field in the biggest escalation of the conflict yet..
A global selloff was exacerbated by hawkish signalling from the U.S. Federal Reserve and as all G7 central banks met within less than 24 hours in a rare coincidence.
The European Central Bank may need to begin discussing rate hikes in April and possibly tighten in June, unless the conflict is quickly resolved, three sources told Reuters. Traders, increasingly worried about inflation risks, no longer see the Fed cutting rates this year. They further boosted rate hike bets in Europe, expected to be more responsive to higher energy prices after a 2022 energy crisis sent inflation soaring.
They now price a roughly 60% chance of an ECB rate hike in April.
Against this backdrop, government bond yields from Britain to Italy and the United States are surging again.
Britain’s two-year yields, sensitive to rate expectations, jumped over 30 basis points (bps). They were set for their biggest daily increase since former Prime Minister Liz Truss’ failed 2022 economic plan.
The selloff across markets was broad, in a sign that investors are growing more worried about inflation and growth risks from the conflict, which analysts say they have priced in as short-lived so far.
European stocks were set for their second-biggest daily fall since the conflict broke out.
“It felt as though markets were positioned for a relatively brief price shock rather than an extended crisis,” said Schroders’ head of global economics, David Rees.
“If we do get prices going higher and staying higher for longer, then it makes sense that the broader washout in markets would be more painful.”
Gold, which had surged earlier this year, fell 4%. Analysts say well-performing trades have been tapped to make up for losses elsewhere.
Nick Kennedy, a currency strategist at Lloyds, noted the latest attacks had brought significant energy infrastructure into the conflict for the first time.
“That is a clear escalation and you don’t know where that ends up, so markets are right to be a bit more cautious, as it has crossed the Rubicon.”
The dollar fell 1% against the yen and 0.7% against the euro .
Support for the dollar is “being tempered by the fact that other major central banks are priced to hike this year, whereas the Fed is not,” said Uto Shinohara, senior investment strategist at Mesirow Currency Management.
While traders folded on their bets for Fed cuts following Wednesday’s meeting, they now price in two Bank of England rate hikes by year-end, a huge turnaround from pre-war bets on a rate cut.
Traders fully price in two ECB rate hikes and a strong chance of a third by December. The BoE also vindicated traders’ hawkish bets on Thursday, when policymakers voted unanimously to keep rates on hold, and some raised the prospect of raising rates.
Euro-area and U.S. short-dated bond yields surged about 10 bps .
At one point, traders priced in a high chance of a third move before governor Andrew Bailey pushed back on market pricing.
Even after Thursday’s moves, the stocks selloff remains modest, analysts said, leaving markets exposed to bigger moves.
The S&P 500 stock index, down less than 1% on Thursday, remains not far from recent record highs.
“The IEA called the (energy) shock the largest disruption in history and yet global equity markets are down less than 5%,” said Kevin Thozet, investment committee member at Carmignac.
“There’s maybe an underestimation across markets on the risk that this supply shock morphs into a demand shock.”
Two-year swap rates, off which mortgages are priced, also jumped by the most since 2022 in Britain, signalling potential pain for households.
Higher rates and lower growth could also fuel jitters about private credit.
More broadly, credit markets sold off, with the iTraxx Europe Crossover index measuring the cost of insuring against junk debt defaults, at its highest since May 2025.