The quarter ending next week has delivered one of the most unsettled periods for markets in recent memory, as geopolitics, energy and interest rates combined to unsettle asset prices across regions and sectors.
Markets were hammered by the Iran war, which has been linked to a roughly $7 trillion reduction in global stock market value. At the same time, oil experienced its second-largest quarterly increase of the century and gas prices in Europe almost doubled. Far from easing, global interest-rate expectations have shifted upward, reversing a direction investors had grown accustomed to.
That combination of factors has weighed on the once-dominant, energy-hungry technology giants, interrupted what had been a nascent rally in emerging markets and left traditional safe havens struggling to provide shelter. Gold, the Swiss franc and triple-A government bonds have not delivered the protection many investors expected.
"To say it has been challenging is a little bit of an understatement," said Robert Dishner, Neuberger Berman's head of trading in London. Dishner argued the impact on bond markets has been more dramatic than during the period when COVID was easing and Russia had invaded Ukraine. He contrasted 2022, when markets largely expected the direction of interest-rate moves but not the pace, with 2026, when the direction itself has been "completely reversed," producing a more meaningful change.
That reversal has shown up in sharp moves in short-dated sovereign debt. Italian and British 2-year yields have jumped some 90 to 100 basis points, a change that looks as extreme as seen in previous stressed periods. Benchmark U.S. 2-year yields have risen by more than 50 basis points, while Japan's 2-year yields have reached levels not seen in 30 years. These moves have stoked talk of global stagflation - an economic environment of stagnant growth with persistent inflation.
The market turmoil this year has not been driven solely by the Middle East conflict and higher energy costs. The early months were volatile for other reasons. The U.S.'s capture of Venezuela's President Nicolas Maduro and then Donald Trump's demands to take control of Greenland - a semi-autonomous territory of NATO ally Denmark - and to hit anyone who stood in his way with tariffs contributed to an unpredictable political backdrop.
January produced the largest monthly gain in gold prices since the end of the global financial crisis, while bonds issued by Venezuela - which Caracas has not paid on for nearly nine years - surged about 50% following the Maduro event, making them the year's best performers at that point. At the same time, every member of the so-called "Magnificent Seven" underperformed the global stocks benchmark, and South Korean equities rallied 50% before surrendering roughly a third of those gains. The $2 trillion private credit market has also shown signs of strain, with stresses appearing at large managers including BlackRock and Blackstone.
Gold's performance has been particularly erratic. After a large run-up since the start of last year - it had doubled over that period - gold fell more than 16% in March, setting it on course for its worst month since February 1983. "It's a bit of a surprise," said AXA's chief economist Gilles Moec, noting the contrast between a month that included major conflict in the Middle East and one of the largest energy shocks in decades and the metal's sharp retreat.
The dollar and U.S. Treasuries have not uniformly benefitted from the upheaval. The dollar has gained around 2% in the current month but follows a 9% decline over the previous year. If the Middle East war continues, several major central banks are expected to raise interest rates by more than the Federal Reserve, which reduces the support the U.S. currency might otherwise receive from rate differentials.
Stable currencies that traditionally benefit from current-account surpluses and low inflation - the Swiss franc and the Japanese yen - have been undermined by domestic issues, limiting their safe-haven appeal. Countries that import substantial amounts of oil and gas have faced heightened pressure. Egypt, a significant energy importer that reportedly spends 60% of its revenues on interest payments for its debt, has seen its currency weaken nearly 10% in the month, worsening its fiscal burden.
Other currencies have also slid. Hungary's forint, South Africa's rand, the Thai baht and the Philippine peso have each fallen between about 4% and 7% this month. Bitcoin has risen alongside the dollar in March but remains down more than 20% for the year.
"There has been a shift from leaning against the dollar to leaning towards the dollar," said Sahil Mahtani, director of Ninety One's Investment Institute, though he expects the dollar's decline to resume over time. Looking ahead to the second quarter, Mahtani highlighted a range of continuing uncertainties - ongoing conflicts, central-bank policy reversals, important elections in Hungary and Britain and the imminent conclusion of the Warner Bros takeover - that make a calming of markets unlikely.
Investors, he said, are grappling with whether the present crisis could morph into a COVID-style shock that triggers both social and political upheaval. "It's a real fork in the road," Mahtani said. "And if you have these quickening regime shifts as we have been seeing, that really changes the way you manage portfolios."
Summary
Q1 closed amid wide market disruption driven by the Iran war, steep energy-price moves and a reversal in interest-rate expectations. The resulting stress has hit equities, bonds and currencies, undermined traditional safe havens and produced renewed concerns about stagflation and broader macro instability.
Key points
- Geopolitical and energy shocks: The Iran war is linked to approximately $7 trillion lost in global equities; oil recorded its second-biggest quarterly rise of the century and European gas prices nearly doubled - major impacts for energy and commodity sectors.
- Bond-market repricing: Short-term yields have surged, with Italian and British 2-year yields up 90-100 basis points and U.S. 2-year yields rising over 50 basis points - significant for fixed-income markets and rate-sensitive sectors.
- Mixed safe-haven outcomes and currency stress: Gold fell sharply in March despite earlier gains; the dollar's recent strength is limited by expected relative central-bank moves, while several emerging-market currencies have weakened materially.
Risks and uncertainties
- Prolonged geopolitical conflict: Continued Middle East hostilities could sustain energy-price spikes and further unsettle equities, bonds and commodity-exposed sectors.
- Central-bank divergence: If other major central banks raise rates more aggressively than the Federal Reserve in response to the war, currency and capital-flow volatility could intensify, affecting emerging markets and import-dependent economies.
- Potential for a broader economic shock: Investors are weighing whether the current crisis could evolve into a COVID-style event with wider social and political consequences, which would alter portfolio construction across asset classes.