President Donald Trump’s recent remarks, in which he said U.S. forces would persist in striking targets in Iran over the next two to three weeks and that the U.S. military had largely achieved its objectives, have undercut hopes for a quick resolution to the Middle East conflict. The comments prompted an immediate market reaction: equities and sovereign bonds declined, oil prices jumped and the dollar regained footing against major currencies.
Investors had been encouraged earlier in the week by remarks from the president that had suggested the conflict might wind down, which had supported gains in global stocks and eased the dollar from recent highs. Thursday’s address, however, offered no definite timeline for ending military operations and instead confirmed continued U.S. action, a development that market participants said extended the expected duration of the crisis.
Mike Houlahan, director of Electus Financial Ltd in Auckland, summed up investor sentiment: "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. 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?"
Traders reacted quickly to the elevated geopolitical risk, unwinding risk-on positions ahead of a long weekend. The prospect of prolonged disruptions to oil flows has been central to investor anxiety, given the potential for sustained upward pressure on energy prices and the inflationary consequences that follow. The Strait of Hormuz, a strategic chokepoint referenced in market commentary, remains a critical factor for global energy shipments and is seen as a focal point of the supply shock.
Following the president’s comments, the Brent front-month contract for June surged roughly 5% to $106.16 per barrel. Matt Simpson, senior market analyst at Stonex in Brisbane, described the market implications plainly: "With no plans to reopen the Strait of Hormuz that he effectively closed, oil prices are to remain high indefinitely," he said, adding that markets will need to confront "the next round of inflation."
Analysts warned that the combination of elevated inflation expectations and weaker growth could revive stagflation concerns. Russel Chesler, head of investments and capital markets at Vaneck in Sydney, said the defining worry for investors is timing: "The key question in all investors’ minds is ‘when is this going to be over?’, that is what is creating the volatility," he said. "We are looking at a situation now where we are getting into a stagflation situation with lower growth and higher inflation expectations."
Japan’s policy makers have also flagged the difficulty of addressing such a mix with monetary tools alone. Toichiro Asada, a newly appointed member of the Bank of Japan board, said that potential stagflation risks arising from the Iran war would be hard to manage using monetary policy.
Markets beyond equities and oil reflected the shift. Treasury yields rose in Asia on concerns that higher inflation would reduce the chance of easier monetary policy in the near term. Yields on 10-year U.S. notes climbed by about 5 basis points to 4.376% after the president’s speech.
The U.S. dollar, which had benefited from safe-haven demand since the conflict erupted in late February, reversed two days of declines and strengthened against major currencies on Thursday. Carol Kong, currency strategist at Commonwealth Bank of Australia, pointed to the potential for further dollar gains if the conflict endures: "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," she said. "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."
With the president confirming a continued operational window of two to three weeks, analysts expect elevated volatility to persist as investors watch developments closely. Near-term market direction is likely to see higher oil and dollar prices as traders seek safety and reassess exposure to risk assets, while fixed-income markets weigh the implications of firmer inflation expectations on monetary policy paths.
Summary
President Trump’s confirmation of ongoing strikes in Iran for the coming weeks intensified market fears of an extended conflict. Global equities and bonds slid, Brent crude spiked to above $106 a barrel, and the dollar strengthened as investors moved to safer assets. Market participants warned that sustained oil disruptions could fuel inflation and raise the specter of stagflation, complicating monetary policy responses.
Key points
- Geopolitical escalation - Continued U.S. strikes in Iran extended the anticipated timeline for conflict resolution and pushed markets into risk-off mode.
- Energy market impact - Brent crude surged roughly 5% after the speech, reflecting concerns over prolonged supply disruption centred on the Strait of Hormuz.
- Financial market reactions - Equities and bonds fell while the dollar firmed and 10-year Treasury yields rose as investors priced in higher inflation risk and potentially tighter monetary policy.
Risks and uncertainties
- Prolonged supply disruptions - Continued strikes and the potential closure of key shipping lanes could keep oil prices elevated, amplifying inflationary pressure across energy-dependent sectors.
- Stagflation threat - The mix of slowing growth and rising inflation could re-emerge as a central market risk, challenging policymakers and weighing on consumer-facing and industrial sectors.
- Policy response ambiguity - Rising inflation expectations may limit central banks’ scope to ease monetary policy, with implications for fixed-income markets and financial conditions.