Middle East Conflict Escalates, Global Stocks and Bonds Fall, Was It Really Caused by One Sentence From Trump?

TradingKey - On Tuesday local time, the escalation of conflict in the Middle East triggered severe volatility in global markets, causing gold ( XAUUSD ), bonds, and stocks to decline in tandem, an unconventional movement that shattered the conventional logic of 'buying safe havens in times of chaos and trading stocks in times of stability.'

Markets had previously anticipated a quick resolution to the conflict, maintaining relatively stable sentiment. However, as Trump issued threats to strike Iran 'at all costs,' and as Iran continued its attacks on energy infrastructure in Gulf nations and oil tankers in the Strait of Hormuz—a waterway carrying one-fifth of the world’s energy shipments—market sentiment shifted instantly to panic.

Now, with both the U.S. and Iran adopting an 'at all costs' stance in this confrontation, panic has swept through the markets. On that day, with the exception of rising oil prices and a stronger U.S. dollar, major global stock markets, U.S. Treasuries, other government bonds, and even gold—traditionally viewed as a 'safe haven'—all suffered widespread sell-offs.

Michael Arone, chief investment strategist at State Street Global Advisors in Boston, noted that the current market reaction is a typical response to highly uncertain events. Gold prices plunged 4% in a single day after hitting a four-week high on Monday; this indiscriminate selling further confirms the level of panic in the market.

Global stock markets decline

Global financial markets are struggling under the weight of panic.

The MSCI Asia Pacific Index fell as much as 2.5% intraday, marking its worst two-day cumulative performance since April. Japanese and South Korean stocks plummeted collectively, with the Nikkei 225 closing down 3.1%, the TOPIX down 3.2%, and the KOSPI crashing 7.2%, its largest single-day drop since August 5, 2024. Australia's S&P/ASX 200 also closed 1.3% lower at 9,077.30 points.

Panic quickly spread to European and American markets. Wall Street faced heavy selling pressure at the open, with the Dow Jones Industrial Average plunging as much as 1,038.78 points, or 2.12%, falling below the 48,000-point mark to a low of 47,866.00. Technology stocks were not spared either, as Nasdaq 100 futures fell by more than 2%, indicating a rapid cooling of market risk appetite.

By the close, all four major U.S. indices finished lower. The Dow Jones Industrial Average fell 403.51 points; the S&P 500 index decreased 64.99 points; and the Nasdaq Composite fell 232.17 points, a decline of 1.02%.

President Trump's vow to act 'at all costs' regarding Iran has fueled a new wave of stock sell-offs. As energy prices continue to climb, the geopolitical security situation in the Gulf region is evolving into a systemic risk affecting the global economy.

Bond market turmoil

The market panic triggered by the escalation of conflict in the Middle East has spread to the bond market, long considered a 'safety cushion,' upending traditional safe-haven logic. Inflation fears have returned to dominate global fixed-income markets. From Sydney to Tokyo, government bonds from multiple nations faced massive sell-offs, plunging global bond markets into a rare panic-driven decline.

Since the start of this week, government bonds in countries including the U.S., Japan, Australia, New Zealand, South Korea, and Indonesia have all recorded losses. The Bloomberg Global Aggregate Bond Index fell 0.8% on Monday, its largest single-day decline since May last year.

The yield on the U.S. 10-year Treasury surged 10 basis points in a single day. On Tuesday, the yield on Australia's 10-year government bond jumped as much as 12 basis points to 4.75% during intraday trading, while the yield on Japan's 10-year bond also rose 6 basis points. The decline in Asia-Pacific bond markets even exceeded the overnight performance of U.S. Treasuries.

Reserve Bank of Australia Governor Michele Bullock explicitly stated that the central bank is 'highly vigilant' about the possibility of the Middle East conflict driving up inflation expectations and is prepared to take policy action if necessary.

Mohamed El-Erian, former CEO of PIMCO, warned that against the backdrop of rising geopolitical risks, a new 'wind of stagflation' is sweeping through the global economy. The ultimate impact will depend on the duration and scope of the conflict, a situation that could drive global bond markets into a sustained sell-off.

This round of selling has completely shattered common market logic. Typically, when geopolitical crises occur, capital flows into safe-haven assets like government bonds, pushing yields down. However, the expectation of rising energy prices triggered by the conflict in Iran is upending this traditional paradigm.

Gareth Berry, a strategist at Macquarie Bank, noted that contrary to popular belief, energy supply risk shocks emanating from the Middle East typically drive up global bond yields rather than lowering them. At a time when expectations for monetary easing have already been priced in, these expectations now suddenly seem difficult to fulfill, making the aforementioned effect particularly pronounced.

Crude Oil and the U.S. Dollar as the Only 'Safe Havens'?

Meanwhile, capital is flooding into crude oil and the U.S. dollar, seeking shelter in these two assets.

Brent crude prices surged nearly 7% in a single day, while the U.S. dollar rose across the board against non-U.S. currencies such as the euro, pound, and yen, all reaching multi-month highs.

Since Trump’s return to the White House last year, the traditional safe-haven attribute of the U.S. dollar during periods of market volatility has weakened significantly. Uncertainty in economic policy and geopolitical instability have made overseas investors increasingly cautious about dollar-denominated assets.

Last weekend, the joint U.S.-Israeli forces launched large-scale bombings of Iranian targets, sparking a chain of regional conflicts. Following the news, the U.S. Dollar Index jumped sharply, which on the surface appeared to be a resurgence of safe-haven sentiment.

However, Reuters columnist Mike Dolan pointed out that the core logic behind the dollar's rise is not capital flocking to the dollar for safety, but rather structural differences in energy exposure across major economies—investors buying the dollar are essentially selling currencies of energy-importing economies.