Escalating conflict sparks market chaos, leaving borrowers guessing
The US military’s weekend strikes on Iranian nuclear sites, which President Donald Trump called “a spectacular military success”, have sparked fresh volatility across global markets, triggering concerns over oil-driven inflation and its impact on interest rates.
Trump claimed Iran’s nuclear enrichment facilities had been “obliterated.” He warned of further action unless Iran agreed to peace. Iran, in response, vowed “everlasting consequences” and ramped up strikes on Israel.
Market strategists expect a “knee-jerk selloff” in equities as trading opens, with investors worried about possible Iranian retaliation and further oil price spikes.
“It’s hard to imagine stocks not reacting negatively and the question is how much. It will depend on Iranian reaction and whether oil prices spike,” Steve Sosnick, chief market strategist at Interactive Brokers, told Reuters.
"Really what we’re looking at is secondary order effects – the price of oil, market stability, price hikes through the economy. No globally important stock is directly affected by what happened tonight.”
Although US stocks had recently rebounded from their early-April slump, with the S&P 500 sitting just below its February highs, the heightened geopolitical risk could prompt more investors to seek safety in US Treasuries and the dollar, at least in the short term.
When geopolitical turmoil erupts, investors rush to safe-haven assets, such as US bonds, which pushes prices up and yields down. This can temporarily lower US mortgage rates, since they are closely linked to movements in the 10-year Treasury yield.
But any sustained conflict, especially if oil prices remain high, may reverse that trend quickly if inflation heats up.
Rising oil prices and inflation risks
However, the situation is more complex this time. Oil prices have already jumped on the back of the conflict and could rise further if Iran retaliates or if the region’s energy supply is disrupted.
“The question is oil prices and what that does to inflation – which has implications for monetary policy and how long the Fed keeps rates ‘meaningfully restrictive,’” said Sonu Varghese, global macro strategist at Carson Group.
Higher oil and energy prices can quickly feed into broader inflation, potentially slowing or even reversing the Federal Reserve’s plans to cut interest rates this year.
Last week, the Fed kept rates steady but signaled that future rate cuts are likely to come at a slower pace than previously expected, in part due to inflation risks from Trump’s tariff plans and now, possibly, the Middle East conflict.
“What we’re waiting for, to reduce rates, is to understand what will happen with the tariff inflation. There’s a lot of uncertainty about that,” Fed Chair Jerome Powell said Wednesday, even before the U.S. strikes on Iran.
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Powell noted that tariffs and global instability, including oil shocks, take time to work through supply chains and reach consumers.
“Someone has to pay the tariffs… between the manufacturer, the exporter, the importer, the retailer, ultimately somebody putting it into a good of some kind — or just the consumer buying it,” he said.
Conflicting signals
Some investors still see the strikes as a potential source of short-term market reassurance if escalation is avoided.
“I think it’s going to be very positive for the stock market,” said Mark Malek, CIO at Siebert Financial, adding that investors had been bracing for prolonged uncertainty. “So this will be reassuring, especially since it seems like a one-and-done situation and not as if [the US] is seeking a long-drawn-out conflict.”
As upcoming economic reports—including business activity, housing sales, and Friday’s PCE Price Index—roll in, the Fed’s next steps will depend not only on the data, but on how the conflict abroad affects inflation expectations at home.
"Remember, the survey-based data all got crushed in the March, April, May time frame ... my expectation is we're still going to see an improvement," Mark Hackett, chief market strategist at Nationwide said before the US attacked Iran.
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