Global equity and bond markets fell on Thursday as heightened doubts over Iran's willingness to negotiate a ceasefire in the Middle East pushed oil prices higher. Traders are seeking clearer signals to determine whether the regional conflict is nearing an end.
In Europe, the Stoxx 600 index dropped 1.3% to 579.60, halting a three-day rally. With the Strait of Hormuz remaining closed, Europe is particularly vulnerable to surging crude prices, which could worsen inflation and growth concerns. Since the onset of hostilities with Iran, the Stoxx index has fallen more than 8% and is nearing a technical correction.
With roughly 48 hours remaining before the U.S. deadline to strike Iranian energy infrastructure, U.S. stock futures indicated that blue-chip indexes may give up Wednesday’s gains at the open. Dow futures fell 0.6%, while S&P 500 futures declined 0.65%.
Nasdaq futures, heavily weighted toward tech stocks, dropped 0.8%, reversing gains from the previous session. Memory chipmakers extended losses in premarket trading after Google announced a technology that could reduce AI memory requirements.
Meanwhile, the private credit market remains under scrutiny after Jefferies Financial Group reported earnings below Wall Street expectations, hurt by losses from wrong-way credit bets. A private credit fund managed by Ares Management Corp. recorded its largest monthly loss on record in February.
"The challenge for investors right now is gauging how long this conflict will last and what the endgame might look like," said Craig Cameron, portfolio manager at Templeton Global Equity Group.
Conflicting statements from U.S. and Iranian officials regarding a ceasefire have prolonged uncertainty over the month-long conflict. As Iran continues to reject U.S.-led negotiations, reports suggest the Pentagon is preparing options for a "final blow," including ground troops and large-scale airstrikes.
Analysts warn that without diplomatic progress—especially if the Strait of Hormuz remains closed—the risk of a sharp military escalation will grow. Some U.S. officials believe a decisive show of force could strengthen Washington’s hand in negotiations or simply allow the administration to claim victory.
Arab mediators are pushing for U.S.-Iran talks as early as this week, and the U.S. president has expressed a desire to avoid a prolonged war. However, Iran’s foreign minister stated late Wednesday that Tehran has no intention to negotiate, though private channels suggest a willingness to engage.
A key sticking point is that both sides are making maximalist demands that go far beyond pre-war discussions, raising investor concerns that the conflict may drag on.
Brent crude resumed its climb, rising 3.2% to above $105 a barrel. Earlier optimism over a possible ceasefire had pushed prices down to $93.45 on Wednesday, but that sentiment has since faded. The rebound has reignited inflation fears and lifted bond yields as markets price in tighter monetary policy.
"Despite continued U.S. efforts to negotiate, Iran has rejected proposals and is considering transit fees for vessels," said Kim Soo-jin, an analyst at MUFG. Such a move would reinforce Iran’s control over the Strait of Hormuz.
She also noted the significance of Iran’s threat to take over or close the Bab el-Mandeb Strait, a narrow chokepoint for maritime traffic toward the Suez Canal that handles about 12% of global seaborne oil.
"Higher interest rates will certainly pressure equity markets, which has been a key factor in recent weakness," added Cameron.
"If Iran signals openness to talks and the Strait of Hormuz reopening looks more likely, equities could quickly rebound to previous highs," said Wolf von Rotberg, strategist at Bank J. Safra Sarasin. "So far, Iran has rejected all offers, believing time is on its side."
Rob Kapito, president of BlackRock, warned that investors may be underestimating the war’s risks, which could weigh on growth and fuel inflation even if the conflict ends soon. "If disruptions last a week, six months, or a year—what does that mean for the companies I own? My biggest concern is that people aren’t taking this seriously and are just assuming an optimistic outcome."
The OECD stated that the conflict is reawakening inflation concerns and hampering the global economy, which had only just begun to recover. The organization now expects average inflation in major economies to reach 4%, with even higher levels in the U.S., up from a December forecast of 2.8%.
Money markets now price in about a 50% chance of a Fed rate hike this year. According to LSEG data, interest rate futures suggest a more than 65% probability of an ECB rate hike in April.
Rising short-term European bond yields, reflecting interest rate expectations, have pressured equities. The U.S. 2-year Treasury yield rose 4 basis points to 3.93%, while the 10-year yield climbed 3.6 basis points to 4.362%. The U.S. Treasury will auction $44 billion in 7-year notes, closely watched after weak demand in earlier 2-year and 5-year auctions. Several Fed officials are also scheduled to speak.
Eurozone bond yields also rose noticeably, tracking U.S. yields and oil prices. Germany’s 10-year yield increased 5.6 basis points to 3.009%, while Italy’s 10-year BTP yield climbed 8.3 basis points to 3.924%.
"Whether there's a war or not, bond yields now look closer to fair value than a month ago, largely due to underlying inflation and widening fiscal deficits," said Daniel Murray, deputy chief investment officer at EFG Asset Management. "The war may have just accelerated this repricing."
Higher energy prices typically benefit the dollar, as the U.S. is a net oil exporter and markets are pricing in potential Fed tightening.
Gold fell below $4,450. "Despite a recent rebound, gold is still down about 15% since the war began," said MUFG analysts. "Rising inflation expectations, driven by energy prices, have reduced expectations for rate cuts and raised the likelihood of further monetary tightening, pressuring gold."
Later in the session, traders will monitor speeches from Fed officials for clues on how the central bank views inflation risks stemming from the conflict. Latest initial jobless claims data will also be released.
U.S. officials stated that the Pentagon is preparing for a "decisive battle" in the Iran conflict. According to reports, the military is drafting plans for a "final strike," which could involve ground troops and large-scale bombing campaigns.
Options under consideration include invading or blockading Hormuz Island, seizing Larak Island to weaken Iran’s control over the strait, occupying Abu Musa and nearby islands near the western entrance, or intercepting Iranian oil tankers exiting the eastern side of the strait. Ground operations deeper into Iran aimed at securing enriched uranium at nuclear facilities are also being prepared.
Former Goldman Sachs CEO Lloyd Blankfein warned investors against excessive optimism regarding the Middle East situation. Even if the Iran conflict were "resolved tomorrow," the damage would "linger," he said, urging investors to prioritize contingency planning.
Blankfein noted that some market participants may be too optimistic, adding that betting on a quick resolution is as risky as assuming the conflict will never end. "Even if fighting stops tomorrow, the damage to infrastructure will pressure markets for some time. And there's no sign yet of a near-term resolution," he remarked.
David Neal, CEO of IFM Investors, stated that massive spending on AI and the global energy transition could create inflationary pressures for decades. "Investors should pay more attention to inflation, not just because of soaring energy prices," Neal said. He described recent energy price spikes as a "wake-up call" but highlighted other structural pressures.
"Large sums flowing into AI and energy transition represent an inflationary pulse that will last for decades," he added.
Morgan Stanley warned of a "bull trap," saying markets are underestimating the impact of the Middle East war. The bank expects the dollar to weaken as interest rate differentials between the U.S. and Europe narrow and the conflict restrains growth.
Since the U.S.-Israel strike on Iran on February 28, the dollar has strengthened due to its safe-haven status and its role as the currency of the world's largest energy producer. A dollar index has risen 2% since the war began, hitting its highest level since December on Monday.
Meanwhile, the euro and yen have each fallen more than 2% during the conflict, as both regions rely heavily on Middle Eastern energy supplies.
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