LONDON, April 2 - Financial markets suffered another setback as hopes for a rapid resolution to the U.S.-Israeli conflict with Iran were undercut by President Donald Trump’s vow of more aggressive strikes. The development has amplified headline risk and left traders confronting one of the largest oil supply disruptions on record, complicating the task of pricing the economic impact for the weeks ahead.
Investors who opened April betting on a quick end to hostilities were forced to revise positions as equities slid and yields rose, underscoring the elevated uncertainty at the start of the second quarter. Credit and equity desks privately acknowledge that markets today feel vulnerable to further downside, and bond-market sentiment is shifting - from an earlier focus on inflation towards growing fears about economic growth following a difficult March for risk assets.
Why oil matters
Oil is now the principal barometer for assessing the scale of the shock. Prices surged through March and recorded a 60% increase for the month, and the rise resumed sharply this week as markets reacted to renewed military escalation. Futures traded near $110 a barrel as supply disruptions intensified.
The International Energy Agency estimates that roughly 12 million barrels per day of production, approximately 12% of global consumption, have been removed from the market since the conflict began. Some Gulf exporters have attempted to reroute shipments away from the Strait of Hormuz - Saudi Arabia and the United Arab Emirates among them - but other producers, including Iraq and Kuwait, are confronting significant export constraints.
OPEC+ ministers are due to meet on Sunday but, according to market participants, the group’s options are limited. Several of the eight members - Saudi Arabia, Russia, Iraq, Oman, Algeria, Kazakhstan, Kuwait and the UAE - had been incrementally raising output prior to the flare-up in the region. Given the scale of recent disruptions and the output cuts already in effect, OPEC+ ministers face constrained room for manoeuvre.
Inflation data and policy implications
Next week’s U.S. consumer price report is set to be a key gauge of how much the conflict is transmitting into domestic prices and consumer purchasing power. A Reuters poll of economists suggests headline U.S. consumer prices are likely to rise 0.9% month-on-month for the period in question - the strongest monthly increase since 2022 - while core inflation, which excludes food and energy, is expected to be more moderate at 0.3%.
Spiking oil prices have already pushed the national average price of gasoline above $4 per gallon for the first time in more than three years, a development that carries political significance in a key U.S. election year and presents a complicating factor for the Federal Reserve. The market has effectively erased bets on a rate cut this year as the central bank continues to balance inflation risks against labour-market strength. In addition to the consumer inflation report, the Fed’s preferred measure - the personal consumption expenditures price index - is scheduled for release next week, though that reading will cover February.
Regional effects: Asia and India in focus
The economic impact of higher oil costs is global but is especially pronounced in Asia, which sources about 60% of its crude from the Middle East. Businesses across the region are already feeling the squeeze, and upcoming inflation prints from the Philippines, Thailand, Taiwan and China will offer a clearer picture of how much pressure households and companies face.
Currency moves are amplifying the pain in Asian markets. A resurgent U.S. dollar has prompted heavy selling of regional currencies this month, making imports more expensive and increasing inflationary pressures for import-dependent economies. Despite these headwinds, many investors are betting that China will be relatively insulated from the shock because of its substantial crude stockpiles, its strong position in green energy, and subdued consumer price pressures.
India is another major Asian importer under close watch. The Reserve Bank of India is widely expected to keep its main repo rate at 5.25% when it meets on Wednesday. Economists have been trimming growth forecasts amid weaker near-term momentum, and the recent sharp depreciation of the rupee means higher energy costs are poised to feed into inflation. The RBI has already deployed billions of dollars of foreign exchange reserves and adopted a series of unorthodox measures recently to stem the currency slide.
Also on Wednesday, central bank governors in New Zealand will convene. Markets see little chance of a rate increase in that meeting, but the central bank chief has warned that a prolonged energy shock could necessitate tighter policy further out if pressures persist.
Market positioning and what to watch this week
Traders and strategists will be watching a dense calendar of data and policy decisions to gauge how deeply the oil shock will ripple through inflation, growth, currencies and risk assets. Key items include the U.S. consumer price report and the Fed’s preferred inflation gauge, OPEC+ deliberations, and rate decisions or commentary from several Asian central banks. Given the compressed set of moving parts, markets are likely to remain sensitive to fresh headlines from the region and to further swings in oil and currency markets.
In sum, the renewed escalation in the Middle East has complicated the outlook for global markets by tightening oil markets, reviving headline risk and forcing investors to reassess policy and growth prospects across a number of major economies.