Oil Prices Surge and Iran War Dominate Financial Market Concerns as Q2 Begins
By Reuters | March 31, 2026
As financial markets enter the second quarter of 2026, investors face heightened uncertainty driven predominantly by geopolitical tensions, particularly the ongoing conflict involving Iran, alongside the sharp rise in oil prices. These developments have cast a shadow over global economic growth prospects and stirred concerns regarding inflation dynamics, prompting increased market volatility.
Middle East Conflict Clouds Market Outlook
The war in Iran stands out as a principal source of anxiety for global markets. The conflict has not only threatened the stability of the Middle East — a critical energy-producing region — but also disrupted oil supply chains, pushing prices to surge sharply. Market strategists warn that even if a resolution to the conflict is achieved, the immediate damage to energy infrastructure and the persistence of elevated oil prices are likely to impede economic expansion and keep inflation elevated for some time.
Seema Shah, Chief Global Strategist at Principal Asset Management, which manages nearly $600 billion in assets, commented on the market environment: “It’s difficult to look through the noise when the noise is all we have.” Shah emphasized that despite global equities facing turbulence, diversifying international stock exposure remains a prudent strategy, while not completely turning away from U.S. markets.
Volatility Fueled by Geopolitical and Economic Factors
The first quarter was marked by numerous geopolitical shocks in addition to the Iran conflict, including former U.S. President Donald Trump’s involvement in Venezuela, tensions related to Greenland, and the ongoing impact of AI technologies disrupting market sectors. Among these, oil prices were the standout performer, skyrocketing about 90% since the start of the year and surpassing $100 per barrel.
This spike has unsettled bond markets as well, with investors rapidly adjusting their outlook on interest rate hikes in response to inflationary pressures driven by higher energy costs. Analysts surveyed by Reuters project oil prices to remain elevated, ranging from $100 to as high as $190 per barrel, averaging around $135. According to the online prediction market Polymarket, there is a roughly 36% probability the war will end by mid-May and a 60% chance by the end of June, reflecting ongoing uncertainty.
Bond Market Turmoil and Central Bank Responses
The surge in oil prices and geopolitical uncertainty has led to heightened borrowing costs in major economies. For instance, Britain and Italy saw their short-term borrowing rates climb by about 75 basis points in the quarter alone, with significant moves also recorded in U.S., German, and Japanese debt markets.
Manish Kabra, a multi-asset strategist at Societe Generale, highlighted key lessons from previous oil shocks: “Only two things matter: the duration of the shock and the central bank reaction, which defines the broader risk appetite.”
Market participants have almost ruled out the possibility of U.S. interest rate cuts this year, while in Europe and Britain expectations have shifted towards additional hikes instead of the previously anticipated easing. Emerging markets have also curtailed monetary easing plans amid the global uncertainty.
Kabra pointed to the upcoming U.S. Memorial Day weekend as a potential pivotal moment when consumer pressures to reduce energy costs could sway policymaker decisions. Reflecting the changing landscape, asset allocation to commodities has increased from 10% pre-war to 15% since hostilities intensified.
Bonds Poised for Potential Recovery; Stocks Under Pressure
While bonds have suffered as yields rise and prices fall, some investors expect a rebound if the conflict resolves. Francesco Sandrini, Head of Multi-Asset Strategies at Amundi, Europe’s largest asset manager, mentioned increasing exposure to short-term euro zone government bonds and mid-duration U.S. Treasuries. He anticipates that central banks might look beyond short-term price shocks to stabilize markets.
Similarly, Paul Eitelman, Global Chief Investment Strategist at Russell Investments, believes bonds have become more attractive relative to a few months ago. Meanwhile, the U.S. dollar, considered a safe haven currency, strengthened by over 2% in March. However, analysts suggest this rally may not persist if tensions ease and investors diversify away from U.S. assets again.
Conversely, gold prices declined by approximately 4% in March, defying its typical safe-haven role during inflationary uncertainty as investors sought liquidity to offset losses elsewhere.
Equities Face Increased Selling Pressure
Stock markets have so far demonstrated relative resilience, supported by robust corporate earnings and technology sector strength. Nevertheless, recent selling has intensified. The S&P 500 and Europe’s STOXX 600 indices have dropped between 9% and 10% from their recent peaks, while Japan’s Nikkei has fallen nearly 13% from February’s record highs.
Guy Miller, Chief Market Strategist at Zurich Insurance Group, disclosed that he has reduced his equity exposure. “I moved to underweight equities from overweight prior to the war given the darkening economic outlook,” Miller said.
Additional indicators echo this dimmed outlook: U.S. consumer sentiment fell more than anticipated in March, German investor morale plunged, and purchasing managers’ indexes for both the U.S. and euro zone hit multi-month lows, signaling slowing business activity.
Economic Growth Prospects Diminishing
The Organisation for Economic Co-operation and Development (OECD) recently warned that the global economy has been derailed from what was a stronger growth trajectory due to the cumulative effects of the conflict and energy price shocks.
Miller concluded, “This war is unlike the geopolitical and political surprises we have seen over the past year, which had a negligible impact on earnings, margins, and market multiples.”
Looking Ahead
As Q2 unfolds, investors remain on edge, balancing the risk of a protracted conflict and persistent inflation against the potential for resolution and market stabilization. The interplay between geopolitics and commodities will likely continue to dominate market sentiment, with policymakers closely watching consumer pressures and energy markets for signals on future monetary policy direction.
Reporting by Dhara Ranasinghe; Additional reporting by Amanda Cooper; Editing by Yoruk Bahceli and Susan Fenton