A surprising month for the markets with the war in the Middle East

Oil prices are rising, bond yields are rising and inflation is slowing… stock markets saw dramatic moves in March due to the war in the Middle East.

– Oil prices on fire, stagflation stalks –

The closure of the Strait of Hormuz, through which a fifth of the world’s crude oil passed before the war, sent oil prices soaring.

The price of Brent crude, the benchmark international oil contract, rose nearly 50 percent.

That’s the monthly gain since Bloomberg began collecting oil price data in 1988.

WTI, the benchmark US oil contract, closed above the symbolic level of $100 per barrel on Monday. It could see its biggest monthly profit since 2020.

Economist Sylvain Bersinger called it a “mini-oil reference”.

Rising oil prices raise the risk of deflation, a period of high inflation and weak growth that central banks find difficult to deal with, as lowering interest rates to support growth feeds inflation while raising rates causes recession.

– Stocks in the red –

Stocks have fallen as rising oil prices are bad for economic growth.

In Europe, where indices were playing at record highs, they fell sharply.

Paris’s CAC 40 index fell 8.9 percent in March, its worst monthly performance since the outbreak of the Covid-19 pandemic in March 2020.

The Stoxx Europe 600 index, which includes the continent’s largest companies, and Frankfurt’s DAX, both turned in their worst monthly performance since June 2022.

In Asia, Tokyo fell 13.2 percent and Seoul fell 19.1 percent.

Wall Street’s main indexes were headed for a monthly loss of seven percent.

– Dollar strengthens –

The dollar strengthened as investors sought it as a safe haven. It gained 2.4 percent against the euro in March. It had been falling in recent months due to concerns about the policies of US President Donald Trump.

The dollar also benefited from being the currency used to sell oil. Higher prices meant that countries needed to buy more dollars to buy oil.

America’s economic self-sufficiency in oil and gas also means it has the potential to mitigate the effects of oil shocks.

Some investors “sold all their assets to move their money to the United States,” said Eric Bleines, deputy director of Swiss Life Gestion privee, a wealth management firm.

– The ruler presents the climb –

As inflation increased with higher oil prices, investors sought higher yields in government bonds.

Germany’s 10-year Bund is the talk of the eurozone. It rose above three percent – its highest level since 2011 – compared to 2.7 percent before the war.

The yield on France’s 10-year government bonds rose above 3.7 percent, the lowest level seen since 2009, which could complicate the government’s efforts to reduce the budget deficit as borrowing costs rise.

– Uncertainty –

Markets were also gripped by intense uncertainty as Trump’s stances, sometimes in similar guises, lifted prices in different directions.

Trump’s numerous threats against Iran have sometimes prompted investors to make the so-called TACO trade – Trump Always Chickens Out – to bet that the American president will not follow through.

They did not remain alarmed as Trump continued to wage war.

“Things can go either way, every day,” said ING analyst Vincent Juvyns.

He asked the investors to withdraw.

He said: “Historically, over time, markets recover after political upheaval.”

Ipek Ozkardeskaya at Swissquote Bank said markets will continue to be driven by headlines and movements in oil prices.

“Until there is meaningful progress towards peace, any gains in stocks, bonds or gold are likely to remain weak,” he said.

fcz/rl/giv