Turmoil in the Middle East sparked fresh losses in stocks and bonds, with fears about an escalation of the war in Iran boosting oil prices as anxiety builds around the potential economic fallout of the conflict.
The drop in equities deepened, with the S&P 500 falling 1.5% as CBS reported the Pentagon is preparing to deploy ground forces into Iran. President Donald Trump rejected the idea of declaring a cessation of hostilities. Speculation grew the US is weighing a plan to seize Kharg Island, but Trump was evasive about his plans for the major oil-export hub. Brent topped $112.
As Treasury yields climbed, traders priced in a 50% chance of a Federal Reserve hike by October. The dollar rose. Gold saw its worst week in four decades.
Markets have been rocked by disruption to supply out of the Persian Gulf, with the Strait of Hormuz near a standstill. A third the size of Manhattan, Kharg Island could be taken over quickly and serve as crucial leverage in the campaign to get Tehran to release its blockade of the waterway.
US officials say the White House is sending hundreds of Marines to the Middle East. Trump again lashed out at military allies, including North Atlantic Treaty Organization members as well as China, for refusing to help unblock the Strait that helps carry roughly a fifth of global oil and natural gas flows.
“Investors initially thought that the Iran war would be short,” said Jose Torres at Interactive Brokers. “But as aggressions intensify amid no light at the end of the tunnel, the pain on Wall Street continues.”
Fed Governor Christopher Waller said he’s cautious about how oil prices will impact inflation, though jobs weakness may still warrant rate cuts. Fed Vice Chair for Supervision Michelle Bowman told Fox Business she supports three reductions in 2026 and expects strong growth, but is keeping an eye on the war.
“The Fed is caught between slowing growth and renewed inflation pressure, with neither side clearly dominant,” said Julia Hermann at New York Life Investment Management.
“The stock market remains in negative territory for the year, and has made new 2026 lows this week, which suggests that the market may not have yet found its bottom and is still in the process of sorting out and pricing in the duration of the Middle East conflict,” said David Laut at Kerux Financial.
Since the outbreak of the war, the S&P 500 has fallen about 5.5%. The gauge posted its fourth straight week of losses, the longest such streak in a year.
Traditional havens are not protecting investors, with bonds losing value as traders react to inflation and federal budget concerns while gold has tumbled, noted Mark Hackett at Nationwide.
Money market funds are the safe haven of choice, Hackett added, suggesting investors are parking money on the sidelines rather than engaging in a structural allocation shift.
Bond traders are scrambling for a new strategy after the oil shock triggered scuppered a popular wager on Fed cuts. By Friday, sentiment had flipped to such a degree that traders now bet the central bank might need to hike to combat inflation.
“We disagree with this assessment as the spike in oil prices should delay Fed rate cuts amid stagflationary pressures, but a sufficient move higher in oil could create a financial conditions shock that may require the Fed to respond with cuts,” said Gennadiy Goldberg at TD Securities.
What Bloomberg Strategists say…
“The Iran conflict has triggered an abrupt repricing of monetary policy expectations, creating tighter financial conditions and leaving the S&P 500 at risk of turning a controlled drawdown into a full correction.”
—Michael Ball, Macro Strategist, Markets Live. For the full analysis, click here.
Some of the main moves in markets:
Written by: Rita Nazareth @Bloomberg
The post “Stocks and Bonds Fall as No End to War in Sight: Markets Wrap” first appeared on Bloomberg
