Stagflation Trades Sweep Markets as Trump Signals Widening War

Anna Rathbun, CEO and Founder at Grenadilla Advisory, discusses her outlook on the markets as traders' hopes for a quick resolution of Mideast conflict fades.

Last week’s wait-and-see stance has changed into something more decisive: markets are pricing in a deeper and longer-lasting supply shock — one that could squeeze growth and revive inflation.

“Investors have had to increase their probability of the worst-case scenario,” said Rajeev de Mello, a global macro portfolio manager at Gama Asset Management. “The challenge is the stagflationary nature of the shock.”

US Treasury yields are up almost a quarter percentage point since the war in Iran started, while about about $6 trillion in global equity-market value has been wiped out. Traders have pushed back bets on the timing of the Federal Reserve’s next interest-rate cut and hikes from the European Central Bank and Bank of England are now priced in.

As crude surged toward $120 a barrel at the start of the day, it became clear the market no longer expects a short confrontation. Brent crude spiked as much as 29% intraday — its biggest swing in almost six years — while measures of equity volatility jumped and trading volumes across Asian exchanges ran well above monthly averages.

The shift gathered pace after President Donald Trump said the US will consider striking areas of Iran that were not previously targets, while the leadership in Tehran vowed not to back down. Trump also said that $100 crude was “a very small price to pay” for “Safety and Peace,” undercutting hopes the conflict would be relatively contained.

And feeding into fears of a prolonged war, Iran named the son of the late Ayatollah Ali Khamenei as its new supreme leader, a defiant move by the Islamic Republic.

Key technical levels fell in quick succession in equities, bonds and major currencies as markets opened across time zones on Monday. The latest events lifted the dollar, while energy shares advanced. At one point, Asian equities tumbled about 5.6%, their steepest drop since April. Bond Swoon

The tandem selloff in stocks and bonds moved from Asia and into Europe as the trading day wore on. Europe, which is particularly sensitive to rising energy prices, has been at the heart of the rout, with blue-chip stocks sinking as much as 3.1% on Monday. In the US, the drop was more muted, with the S&P 500 down by about 0.6%.

READ: Global Bond Selloff Deepens as Oil Jump Stokes Stagflation Fear

“The market is selling off across the board today, regardless of size or style,” said Taku Ito, chief portfolio manager at Nissay Asset Management. “If inflation persists while labor demand weakens, a US recession would become inevitable. For equity markets, that would mean the game is up.”

With traders focused on the risks of an economic slowdown, the cost of protection against defaults on high-grade corporate bonds hit the highest level since May in both Europe and Asia. Even before the war began, parts of the credit market were showing signs of strain, as concerns over AI-driven disruption weighed on areas such as private credit and leveraged loans.

“When markets encounter a black swan, everything could fall at the same time,” said Anna Wu, a cross-asset investment strategist at Van Eck Associates in Sydney. “That’s what we’re seeing today — selling across every corner from equities to bonds and currencies, except for oil and dollar.”

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