This week in the markets: investors welcome US de-escalation after a shaky start to the market week

A dramatic U-turn by President Trump has once again triggered gyrations in global financial markets. After heavy falls across bonds, shares and precious metals early on Monday, markets quickly regained their composure after threats to attack Iran’s power networks were abruptly withdrawn via a Presidential post on Truth Social.

With the White House’s change of direction happening after Asian markets closed but before the US opened, the shift in sentiment played out most clearly in European markets. Having been as much as 2.5% lower, the FTSE 100 bounced back into positive territory within minutes of the US suspending its escalation threat.

As the week’s trading began, investors had been looking in vain for safe havens as global markets eyed President Trump’s deadline for Iran to re-open the Strait of Hormuz. With Iran threatening retaliation if a promised attack on its power networks materialises, investors were concerned that the conflict has entered a newly dangerous phase.

Despite a shaky start to the week, the impact on global markets remains relatively contained, as investors rightly price in the ever-present possibility that the US President might change tack. Investors are reluctant to give up on a market which continues to be supported by strong earnings growth and where an early resolution of the conflict could lead to a rebound in prices.

As well as sharp recoveries in stock markets, bond prices rallied hard on the news. Gilts, where yields had risen above 5%, rose as the yield on the 10-year government bond dipped to 4.9%. That reflected a rapid drop in the price of oil, with the Brent contract falling 10% to $101 a barrel.

Rising correlations

With constrained energy supplies posing the greatest inflationary threat to the global economy since the 1970s, bonds have stopped acting as a diversifier to equities. Rising inflation and interest rates represent a significant headwind for both asset classes. Unusually, gold - sometimes seen as a hedge against uncertainty and rising prices - has also been on the back foot. The US U-turn unsurprisingly saw a significant bounce back for the precious metal, although it remains well below its recent peak.

Despite the relief rally, bond yields are still rising around the world, but nowhere more so than in the UK, where investors have moved to price in four quarter point interest rate hikes in 2026, a significant reversal from expectations just a month or so ago that the cost of borrowing would fall during the rest of this year. Bond yields move inversely to bond prices, so rising yields represent capital losses for fixed income investors.

The 10-year gilt yield climbed above 5% on Monday morning, taking borrowing costs to their highest level since the financial crisis in 2008. Since the Middle East conflict began at the start of March, the 10-year yield has risen by 0.8 percentage points. That puts it on track for the worst month since the Liz Truss mini-budget crisis in 2022.

Yields have risen elsewhere too, with the US 10-year bond yield now 4.4%, up from 3.95% in the days before the crisis began. The equivalent German government bond now yields 3.05%, up from 2.65% at the end of February.

Surging energy prices have fuelled fears that the UK could be facing a period of stagflation. This is a challenging environment for policy makers, because high inflation prevents the Bank of England from cutting interest rates to support the economy. For the government, it means an unhelpful combination of high funding costs for its debts alongside reduced tax revenues as growth slows.

For individuals, too, rising bond yields are a problem because they quickly feed through into mortgage and other loan costs. Since the crisis began, lenders have withdrawn hundreds of mortgage deals in the UK and homeowners who are obliged to refinance maturing fixed rate deals are facing big hikes in their monthly repayments.

Shares follow bonds lower

Stock markets, which ended last week on the back foot, had taken another step lower on Monday after Donald Trump upped the ante over the weekend by threatening a massive attack on Iranian power plants if Tehran does not reopen the Strait of Hormuz by around midnight our time tonight. Mid-morning on Monday, the President suspended but did not withdraw the threat.

Iran, for its part, is showing no sign of complying with American demands and it has continued to launch missiles at Israel and Gulf countries, which it views as supportive of the US/Israel led war. It has promised retaliation, including mining the Gulf if its power infrastructure is targeted.

European shares fell a further 1.7% on Monday morning, meaning they have now moved into correction territory, generally viewed as a fall of at least 10% from the previous high. The UK’s FTSE 100 fell 2.5%, before rallying and the UK market is also close to the correction level. Germany’s DAX was 1.9% lower.

Those falls followed heavier falls in Asia. Australian shares opened the week 1.8% lower, with mining companies hardest hit. Japan and Korea, both big importers of energy, with economies that are vulnerable to rising oil and gas prices, fell heavily. South Korea’s Kospi index was nearly 5% lower in early trading and Japan’s Topix fell more than 3%.

Despite being at the heart of the conflict, the US is actually better protected in stock market terms than many other global markets. That is because, as a net exporter of oil and gas, the economic impact is softened by rising income from energy sales. The impact on share prices has also been tempered by still rising corporate earnings, which has reduced the negative impact of a fall in valuations.

Oil remains the key driver

Stock market declines reflected a further rise in the oil price to around $113 a barrel, close to but still below its crisis high of $120 a barrel. Although the oil market reflects a continuing belief that the oil market will in due course return to more normal levels of supply and demand, Goldman Sachs has raised its longer-term oil price forecast, betting on a longer disruption to flows.

The bank now expects the Brent contract to average $85 a barrel in 2026, up from its previous forecast of $77.

Investors hoping that gold might cushion their portfolios from losses in bonds and equities have so far been disappointed. Gold fell more than 8% as the conflict entered its fourth week, amid expectations that higher inflation will keep interest rates higher in the US and elsewhere.

Interest rates are a key driver of the gold price because the precious metal pays no dividend. The higher the yield on other assets like cash and bonds, the bigger the opportunity cost in terms of foregone income that gold represents.

Gold stood below $4,300 an ounce at its low point on Monday morning, compared to a recent high of over $5,500. The metal had fallen for nine consecutive sessions. Silver, which like gold had enjoyed a stellar run before the Middle East conflict began, fell to around $65 an ounce, compared to a peak of over $100 at the start of the year.

Short term pain, longer term gain

Although investors are nursing short-term losses in their portfolios, they are still sitting on strong gains over the medium term. Since markets bottomed out in October 2022 after that year’s upward reset of interest rates, stock market indices around the world have registered big rises.

The MSCI emerging markets index, for example, bottomed out at 845 in 2022. Although, it had fallen from a high of 1,610 at the end of February to 1,470 by the end of last week, that still represented a gain of more than 70% from the 2022 low point.

Other markets have enjoyed similar trajectories. Japan’s Nikkei 225 index has more than doubled from its level at the start of 2023. The MSCI World index was around 75% higher than its 2022 low point at the end of last week.

One of the striking features of global stock markets over the past month has been the reversal of regional leadership. Through 2025 and the first two months of this year, the US lagged behind other markets. Over that 14-month period, the S&P 500 delivered a 17% return and the world index, dominated by US stocks, was 23% up. By contrast, the FTSE 100 was 34% higher, Japan’s Nikkei rose 48%. Emerging markets were 50% up and Europe was 42% higher.

Over the past month or so, that leaderboard has been turned on its head. Protected by its energy independence and still rising corporate earnings, the US market had lost only 5% from the February high by last Friday and the world index was 7% lower. The FTSE 100 was 9% down, as was the Japanese market and emerging markets. European shares were 12% off their peak.

The swing in relative performance makes a strong case for holding a diversified portfolio, geographically if not at the moment by asset class. Holding a good spread of investments can provide a smoother ride over the longer term.

The longer-term context also argues for not trying to time the market. Although there is a good case to be made that buying the dip in the market may not be as immediately rewarding as it has been during many recent corrections, for longer term investors the biggest mistake can be reducing exposure to the long-term outperformance of shares over inflation and over other assets.

The ups and downs of the market during periods of uncertainty are the price investors pay for those superior long-term returns.