LONDON, April 2 - Markets were once again disappointed as U.S. President Donald Trump crushed hopes that the U.S.-Israeli war with Iran might end quickly. His comments, pledging more aggressive strikes on Iran, left traders scrambling to reprice risk as the conflict intensified a supply shock that already ranks among the largest in modern times.
The immediate market reaction was stark: equity indices fell and previously battered government bond yields climbed, underscoring how uncertainty about the conflict’s trajectory dominates sentiment as the second quarter begins. Many market participants who opened April assuming a pathway to de-escalation found themselves wrong-footed by the renewed rhetoric.
Analysts caution that global stock markets remain exposed to the risk of a deeper correction. Even if hopes for a negotiated respite return at some point, the damage done to Middle Eastern energy infrastructure and the attendant spike in energy prices will still weigh on activity across economies. Observers note that, after a brutal March for markets, the narrative in bond markets appears to be shifting slowly from an emphasis on inflation to mounting concerns about growth - and oil prices are central to that recalibration.
OPEC+ and the immediate supply outlook
Oil will be watched closely as the principal barometer of how the conflict transmits to the macroeconomy. OPEC+ ministers are due to convene on Sunday, but the bloc’s ability to respond is constrained. The group faces a constellation of disruptions and prior output cuts from Gulf producers, reducing their flexibility to offset new losses.
Prices rebounded strongly this week after posting a record 60% jump in March and on Thursday were trading near $110 a barrel. The eight OPEC+ members listed as key participants - Saudi Arabia, Russia, Iraq, Oman, Algeria, Kazakhstan, Kuwait and the UAE - had been incrementally increasing output before the outbreak of hostilities a month ago.
The International Energy Agency estimates that the conflict has already removed roughly 12 million barrels per day of oil production from global markets, an amount equivalent to about 12% of world consumption. Some Gulf producers such as Saudi Arabia and the UAE have rerouted certain flows to ports located away from the Strait of Hormuz, but other sellers, notably Iraq and Kuwait, are confronting export constraints that limit their ability to compensate for lost supply.
Upcoming price gauges and U.S. inflation data
Investors will also be focused on U.S. inflation metrics as a gauge of how much the war is filtering through to consumer prices and household budgets. A Reuters poll shows consumer prices likely rose 0.9% on a monthly basis for the latest reading - the largest monthly increase since 2022 - while the core monthly gain, which excludes food and energy, is forecast at a more modest 0.3%.
This week’s surge in oil pushed the U.S. national average retail price of gasoline above $4 per gallon for the first time in more than three years - a move that will be closely watched in Washington in a key election year and is likely to register with households sensitive to fuel costs. The inflation backdrop is also a challenge for the Federal Reserve, which faces the task of balancing labour market risks against the recent spikes in energy prices. The conflict has effectively eliminated trader expectations for a Fed rate cut this year, and the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, is due next week as well, although that PCE reading pertains to February.
Asia’s exposure: energy dependency, currencies and inflation
The impact of higher oil prices is global, but the shock is amplified across Asia, where roughly 60% of crude imports come from the Middle East. Businesses and households across the region are feeling the strain. Upcoming inflation readings in the Philippines, Thailand, Taiwan and China will provide fresh data points on how these economies are coping with the surge in energy costs.
Compounding the pressure, several Asian currencies have been sold aggressively against a resurgent U.S. dollar this month, effectively making imports more expensive and increasing inflationary pressures for consumers. Yet, investors are placing some bets that China’s economy will be relatively insulated from the worst of the oil shock, citing its substantial crude stockpiles, its prominent role in green energy, and currently subdued consumer price pressures.
Monetary policy crossroads in Asia
India, another major Asian oil importer, merits close attention as central bank decisions approach. The Reserve Bank of India is widely expected to leave its main policy repo rate unchanged at 5.25% when it meets on Wednesday. The RBI faces a difficult trade-off: economists have been trimming growth forecasts while the rupee has slid to record lows, elevating import costs that will soon show up in inflation data.
If the Middle East conflict eases, the consensus view is that India’s policy rate will likely remain on hold for the rest of the year. But the rapid depreciation of the rupee has already provoked an active response from the RBI, which over recent weeks has deployed billions of dollars of foreign exchange reserves and taken a series of increasingly unconventional measures to try to arrest the currency’s fall.
Also on Wednesday, central bank officials in New Zealand will convene. Markets see little likelihood of an interest rate increase at that meeting, yet the central bank chief has warned that a prolonged energy shock could prompt policy tightening in the future - a reminder that a sustained surge in oil costs could force central banks to reassess their stances.
The coming days present a crowded economic calendar against the backdrop of elevated headline risk. From OPEC+ deliberations and U.S. inflation prints to a string of central bank decisions in oil-importing economies, traders and policymakers alike will be parsing limited information for signals about how deep and long-lived the economic consequences of this unprecedented supply disruption will be.