The world’s major stock and bond markets opened the week with a modest rally. Indeed, despite world oil prices more than doubling since the outbreak of the Iran war, markets have so far remained relatively stable. Most major indexes are down but not collapsing and bond yields, though considerably higher, are not yet showing signs of panic.

Don’t expect that to last. Barring a dramatic development that puts a decisive end to the war in sight, the coming week could see the mood in markets change for the worse. If events remain on their current path, investors may well return from their Easter holidays in a mood to dump holdings.

For now, although Donald Trump’s ability to jawbone down oil prices seems to be wearing thin, the markets are still taking him at his word that this conflict will soon end. But that faith won’t hold for much longer. Prediction markets express little confidence in a ceasefire happening before June. Meanwhile, every day that passes with the Strait of Hormuz closed, the oil shortfall on world markets grows larger.

So far, the buffers available — oil already at sea when the conflict started, oil that’s been released from sanctions, domestic stockpiles and releases from strategic reserves — have kept the barrel price from reflecting the actual fall in supply. Those buffers will run out shortly, though. Analysts thus expect prices to start rising steadily over the next three weeks as shortages emerge — starting this week in Africa and Asia, moving onto Europe next week, then reaching the Americas by mid-April at the latest. If the war is still raging come the middle of next month, oil prices could reach $200 a barrel.

Then there’s the bond market. Last week’s US auctions revealed weak demand, and there appears to be growing concern among investors that the American fiscal position is becoming unsustainable — not least with the Pentagon requesting more money to replace damaged equipment and spent munitions. Some analysts expect the 10-year yield to go above 4.5%, in the process dragging up everyone else’s interest rates too.

If interest rates stay high, they’ll put downward pressure on share prices. All the while, the strains in private equity keep building as the stagnant stock market limits the exit pipeline, leaving assets on the books long after they were meant to be sold. Investors looking to cover their losses in private equity may then sell some of their public holdings, placing further pressure on share prices.

Although Trump repeatedly says peace is at hand, events on the ground belie that claim. Instead, the President seems to be caught in an escalation trap. There’s a growing expectation that some kind of ground invasion will begin, possibly to capture Kharg Island or seize nuclear materials. Yet it’s far from clear that such a focused operation would succeed in reopening the Strait of Hormuz. Worse, the risks of it encountering Iranian resistance, which then necessitates more troops and so prolongs and deepens the war, are high.

It seems likely that the only way to force a military resolution is for the US to launch a large-scale and possibly lasting ground operation. Either that or Trump agrees to a deal which would amount to a US surrender. Since he shows no appetite for either, the risk of the situation carrying on and gradually deteriorating grows by the day.

Thus, barring a major development, markets could start to look ugly in the early days of April. Fragile Western economies won’t then be in a good position to withstand the falls.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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