War is over for Wall Street, while oil drags down bonds and gold

As the conflict in the Middle East edges towards its eighth week, financial markets are starting to diverge. US stocks have wiped out all the losses incurred since the start of the war, ​but oil prices are still punishingly high, dragging on both government bonds and gold.

There are dramatic disparities in emerging markets too. Brazilian markets have surged and China’s have ‌seen healthy inflows, but a number of smaller, energy-dependent economies are struggling.

“The US can manage an oil shock of this duration, though Asia is more exposed,” said Markus Hansen, portfolio manager at Vontobel, who said he had been using the selloff to pick up some cheaper stocks.

He said, however, that higher oil prices would lead central banks to push back interest rate cuts.

A SHINING STOCK MARKET ON A HILL

The U.S. benchmark S&P 500  index has recovered to pre-war levels, ​rallying 9% from a March 30 low.

The index finished Monday at 6,886.24, above its February 27 close just before the U.S. and Israel began airstrikes in Iran.

Last week’s ceasefire and hopes peace ​talks will resume are helping. On top of that, Citi and have turned bullish on US equities, flagging expectations for resilient corporate earnings, particularly in tech.

It’s ⁠a dramatic bounce-back. March marked the index’s biggest monthly fall since April 2025’s tariff turmoil.

The VIX volatility index – Wall Street’s so-called “fear gauge” – is back to pre-war levels after spiking to a more than 10-month ​high last month.

Stock market volatility has proven a boon for brokers. Goldman Sachs, and JPMorgan first-quarter earnings were helped by greater trading income.

PHYSICALLY COMPLICATED

Oil prices are below their March highs, but at around $100 a barrel , they ​are still some 40% above where they were in late February.

More worryingly for the real economy, refiners are paying more than $140 a barrel for North Sea crude for near-term delivery , almost double the pre-war going rate.

Some investors have taken comfort from the fact that Brent futures for delivery later this year suggest people believe some kind of resolution will bring prices to around $83.

The problem is that even those contracts are a lot higher than they were before February 28. ​December futures are 21% higher, as are March 2027 futures .

BONDS BRUISED

Those high oil prices mean the situation is very different in bond markets compared to stocks. Borrowing costs from the U.S. to Europe and Japan ​are well above levels traded before the war began.

Higher-for-longer energy prices are fuelling inflation and making central banks more hawkish than before the war.

That means the U.S. two-year Treasury yield is roughly 40 basis points above late-February ‌levels at around ⁠3.76%, but down from March peaks . Britain’s two-year yield is some 75 bps higher .

Gold too has struggled, and remains almost 10% below pre-war levels. Analysts say the safe-haven was the target of profit taking in March, as investors tapped their best-performing assets to help cover losses elsewhere.

CURRENCIES CONTAINED

The dollar is largely back where it was before the war, meaning the dollar index, which tracks the U.S. currency against six others, is now just above its February 27 closing level.

Its post-war gains amounted to around 3% at one point, but the greenback has now given back almost all of those as markets focus on hopes for ​a resolution that would help limit the worst of ​the economic fallout.

At the same time, the ⁠inflationary shock already seen has left investors pricing rate hikes in the euro zone and Britain, but not in the U.S., which supports their currencies.

The euro, at around $1.18 , has regained virtually all of the losses incurred in recent weeks, and the pound is back at pre-conflict levels at $1.136.

ENERGISED ENERGY EXPORTERS

As well as ​asset classes diverging, regions have too.

Unlike the U.S., Europe imports large amounts of its energy needs, leaving the regional STOXX 600 down 2.6% from ​pre-war levels and Germany’s industry-heavy ⁠DAX down 5%.

Equities in other importing nations like Japan and Korea are also sharply lower – though, unlike poorer countries, they can at least still get hold of fuel supplies, even if they have to pay up.

The import-dependent Philippines has declared a national emergency, and its small stock market has lost 8% since the war.

On the other side, Brazil is a big oil exporter, and its main equity index is 5% above pre-war levels, ⁠while the real ​currency has appreciated 2.7% on the dollar .

In developed markets, Norway’s crown is also more than 1% stronger against the dollar ​since the war began.

While China is a big oil importer, it also has large reserves, which, alongside low domestic inflation, have helped its government bond market see inflows and lower yields.

Its green energy stocks have also surged.