The uncertainty of the Iran war is disrupting business in the world’s largest markets

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The Iran war has caused turmoil across financial markets, leaving some investors and market makers reluctant to take risks, making trading more difficult – which regulators are watching.

There is no major global market, from the US Treasury, to gold, to the remaining currencies, said investors and traders. In Europe, hedge funds, which currently dominate bond trading, have added to that momentum as they quickly cut stakes this month.

Traders say they have sometimes struggled to find prices, or make trades in the past four weeks, as market makers are afraid to stick with large positions that could quickly turn unprofitable.

“When we try to sell, it takes longer to do business.” (Market makers) want us to be more patient, to reduce the size of the trade,” Rajeev De Mello, chief investment officer of GAMA Asset Management, added that the gaps have widened between the price at which market makers buy assets and the price at which they will sell them. “What has resulted is that everyone has reduced the size of their positions.”

Various levels of volatility have risen to levels seen in previous market crises, including those in stocks, bonds, oil and gold.

Fractures have emerged even in deep and liquid sovereign wealth funds, the underpinnings of global financial markets that have been hit hard as inflation risks hurt investors.

The spread between bids and ask prices on two-year US Treasuries, a key measure of market depth and cost of sales for the most traded securities, has now widened 27 percent in March, compared to January levels, according to Morgan Stanley, suggesting traders are charging a higher premium for risk.

To be honest, recent signs of market pressure are not uncommon during periods of market turmoil, such as during US President Donald Trump’s “Independence Day” tariffs last April and the 2020 COVID pandemic.

But this level of uncertainty came at a time when the markets were in a broad range, as investors rode a rally across asset classes, suggesting that a deep correction could be in the offing if the war continues and the water evaporates.

In Europe, the pain has been mainly in the futures market for short-term rates, where traders accelerated the high rates of the central bank.

Liquidity was “significantly reduced” at one point, running at 10% of normal levels, Morgan Stanley’s head of EMEA ratings Daniel Aksan said.

He said: “(Illiquidity, price moves) reminds me of the days of COVID.

Three European financial chiefs on Friday said that the ongoing political tension, namely the conflict in the Middle East, poses major risks to the global financial situation through higher energy prices, potential pressures and weaker economic growth. They reiterated their warning about the impact of currency fluctuations and the risk of sudden price changes.

Business has so far remained orderly, but buyers are still in short supply as investors rush to take risks and cash in, leaving sellers hesitant as well.

“Firms have lost a lot of money – whether it’s the selling or the buying side – the money is being destroyed because you don’t have players,” said Tom di Galoma, managing director of global equity trading at Mischler Financial, referring to the US Treasury market.

Although trading volumes in Treasuries are increasing, analysts say some of this activity is done out of necessity, not discretion.

“With a wide flow of bids, it’s more expensive to trade and it may not be very attractive for people to enter the trade, but the fact that you’re seeing high volumes really suggests that some of the ⁠⁠—these were to withdraw, or stop,” said Morgan Stanley, US strategist, Eli Carter.

The particularly sharp selloff in European bonds has also been an example of the effect of hedge funds that can have on the market in times of stress, a risk that the Bank of England in particular has marked as their position increases rapidly in recent years.

Hedge funds now make up more than 50 percent of trading in the British and euro government bond markets, according to Tradeweb’s latest data from 2025.

Although their presence in the bond markets provides money in good times, many were concentrated in similar activities, some of which became apparent quickly.

Hedge funds have taken heavy losses on bets that the BoE will cut rates, three hedge fund investment sources said. They also enjoyed businesses betting on higher yields in Europe and a trade that assumed the gap between Italian and German bond yields would remain narrow, said Credit Agricole’s head of European government business Bruno Benchimol.

As they all lowered the benchmarks at the same time, that pushed bond sellers to widen their bid spreads, ⁠Benchimol added.

As hedge funds de-risk at the same time, it “exacerbates volatility,” said Morgan Stanley’s Aksan. At times, they took positions that helped reduce uncertainty, he said.

But market makers are still under pressure to win trades even as buyers reduce the frequency and size of trades.

Sagar Sambrani, senior FX options trader at Nomura, said prices of big-ticket items have increased in line with normal market conditions to account for market risk. But, “counter-intuitively, small-ticket prices are stronger than normal as market makers try hard to capture the reduced flow of buyers,” Sambrani said.

But sometimes this is not possible.

In the gold market, which is highly sensitive to interest rates, Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund, said there were days when market makers were completely absent, showing a reluctance to act.

The price of the usually safe-haven gold fell this month after a record rally in 2025.

“They don’t want to make money at the time, they don’t want to lose money by being in the market. If they’re given a choice, they don’t want to be in the market,” Dave said.