Last week was a liquidation, the global market started to face up to "the Iran war won't end soon"

Why does the prolonged Iran war shift market expectations?

Since the outbreak of the Iran conflict nearly three weeks ago, the market has held a comforting bet: energy supply disruptions will be short-lived, the Strait of Hormuz will reopen, and the Federal Reserve’s rate-cut cycle will resume as expected. Over the past week, this bet has completely collapsed.

This week, global bond markets experienced a “bloodbath,” gold saw its largest weekly decline since 1983, and U.S. stocks fell for the fourth consecutive week, marking the longest decline in a year. Meanwhile, the market briefly priced in a 50% probability of the Fed raising interest rates instead of cutting.

Mark Malek, Chief Investment Officer at Siebert Financial, called this week a “clearing moment”—markets finally began to face reality: this conflict is not only going to be a long, uncertain war but has also evolved into the worst-case scenario—direct strikes on all energy infrastructure in the region.

At the same time, cross-market pressures are building at the fastest pace since last year’s tariff shocks. According to the US Bank Index, stock and credit trades based on rate cut expectations are collapsing in tandem, and emerging markets are under pressure. Analysts point out that this is no longer a one-time price shock but a persistent threat that investors, central bankers, and business leaders must confront.

Bond market bloodbath and gold collapse: a fundamental shift in market pricing logic

Last week, global bond markets took a heavy hit, vividly illustrating the current market turmoil.

The 10-year U.S. Treasury yield surged 13.4 basis points in a single day, with a total increase of over 10 basis points this week; the 5-year yield broke above 4% for the first time since July, and the yield curve flattened sharply.

European bond markets were not spared: The UK 10-year government bond yield rose 17.7 basis points this week, reaching 5% for the first time since 2008; Germany’s 10-year bond yield hit a new high since 2011 at 3.043%; Italy’s 10-year bond yield rose over 16 basis points this week. The two-year German bond yield jumped 23 basis points.

Gold’s collapse is particularly striking. Spot gold fell more than 10% this week, and COMEX gold futures declined over 11%, marking the largest weekly drop since March 1983.

According to Wallstreetcn, the trigger for gold’s plunge back then was also an oil crisis—Middle Eastern oil-producing countries, suffering revenue declines from falling oil prices, were forced to sell gold reserves for cash. This historical context has sparked market fears of a “repeat.”

Analysts attribute part of the recent gold price decline to rising dollar funding pressures. Cross-currency basis swaps widened significantly this week, indicating signs of dollar liquidity tightening; gold also reconnected with real interest rates—rising real rates put downward pressure on gold.

In precious metals, silver fell even more sharply, with COMEX silver futures down over 16%; industrial metals like copper, aluminum, and tin also declined across the board, with London copper dropping over 6.6% this week, breaking below $11,000.

ETFs tracking the S&P 500, long-term U.S. Treasuries, and gold posted their worst combined weekly performance since the outbreak of the war.

JPMorgan Asset Management portfolio manager Priya Misra warned:

“Risk premiums should be higher—this is the largest energy shock in history, with no simple fiscal, monetary, or energy policy response, and recession risks should be rising sharply. Equity and credit spreads are holding up too well, hoping that companies and households can absorb the energy shock.”

The Fed faces a dilemma as monetary policy expectations suddenly reverse

The core of this liquidation is the market’s abrupt repricing of the Fed’s policy path.

The Fed held rates steady on Wednesday, with Chair Powell stating that the oil price shock has made inflation outlook too uncertain to provide a dovish timetable.

On Friday, Fed Governor Waller expressed caution about how high oil prices might impact inflation but also noted that if the labor market weakens, rate cuts could still be necessary. He also acknowledged that the conflict has become more prolonged, and the risk of sustained high oil prices is rising.

Market reactions have been more aggressive. According to Wallstreetcn, current pricing shows a 50% chance of rate hikes by the Fed within 2026—market participants who previously mainly bet on rate cuts are now forced to revise their strategies, with sentiment rapidly shifting.

Gennadiy Goldberg of TD Securities expressed reservations:

“We do not agree with the market’s rate hike expectations. The surge in oil prices should lead the Fed to delay rate cuts amid stagflation pressures, but if oil prices rise enough, it could trigger financial conditions shocks, forcing the Fed to cut rates instead.”

Bloomberg macro strategist Michael Ball warned that the Iran conflict is causing a sudden revaluation of monetary policy expectations, tightening financial conditions and risking a shift from a controlled correction to a full-blown market correction.

The European Central Bank faces an even trickier situation: energy-driven inflation has limited room for rate cuts, while worsening growth prospects urgently call for easing—placing the ECB in a deadlock.

Wall Street begins to reprice a “long war”

The real turning point in the markets is a fundamental change in investors’ expectations about the conflict’s duration.

According to Wallstreetcn, U.S. officials are signaling that the White House is dispatching hundreds of Marines to the Middle East and evaluating plans to occupy or blockade Iran’s Kharg Island oil export hub—accounting for about 90% of Iran’s oil exports. Trump initially said he did not want a ceasefire this week but later indicated he was considering gradually de-escalating military actions against Iran, while pressuring allies to join the war or help open the Strait of Hormuz.

Jose Torres of Interactive Brokers said:

“Investors initially thought the Iran war would end quickly, but as fighting escalates and there’s no end in sight, Wall Street’s pain continues.”

Christian Mueller-Glissmann, head of asset allocation research at Goldman Sachs Global Investment Research, said:

“If this rate-energy shock persists or deepens, asset growth expectations need to move further into pessimism. Currently, markets are not fully pricing growth risks, which partly explains why U.S. stocks haven’t fallen more.”

Garrett Melson, a portfolio strategist at Natixis Investment Managers, noted that the market is “gradually pricing in longer-lasting ripple effects” and has recently reduced small-cap exposure while increasing allocations to large-cap growth and tech stocks.

Institutional defensive adjustments are accelerating.

• Société Générale lowered global equity allocations by 5 percentage points amid Thursday’s increased volatility, while increasing commodity exposure;
• BCA Research advised clients to raise cash holdings and reduce equity allocations;
• Goldman Sachs global investment research recommended a defensive stance, adjusting tactical allocations to overweight cash, underweight credit, and maintain neutrality in other major asset classes.

Historical data since 1939 shows that after over 30 geopolitical shocks, U.S. stocks typically bottom around the 15th trading day, with an average decline slightly over 4%. Since the war’s outbreak, the S&P 500 has fallen about 5.5%, on the 13th trading day—right in the window where the “worst news” and “maximum market damage” tend to coincide.

David Laut of Kerux Financial said:

“The stock market has remained in negative territory this year and hit a new low in 2026 this week, suggesting it may not have bottomed yet and is still digesting the ongoing uncertainty about the duration of the Middle East conflict.”