Former President Trump issued a stern ultimatum to Iran while simultaneously signaling openness to negotiation, sending conflicting messages that have left global investors in a dilemma. They are preparing for a potential swift ceasefire agreement while also bracing for a sudden escalation that could drive oil prices and bond yields even higher.
On Sunday, Trump used harsh language to warn Iran, stating that if the Strait of Hormuz is not reopened by 8 PM ET on Tuesday, Iran would "live in hell," characterizing the deadline as a combination of "Power Plant Day and Bridge Day." However, on the same day, Trump told Fox News he had "great hope" for a deal before Monday. These contradictory statements forced investors to position their portfolios for two extreme potential outcomes.
Iran promptly rejected Trump's latest threat, insisting the crucial waterway would only fully reopen after Tehran receives compensation for war damages. Meanwhile, Iran continued strikes over the weekend targeting the Gulf region, including an attack on Kuwait's oil headquarters. Rob Subbaraman, Global Head of Macro Research at Nomura, noted, "Markets are on edge, time is running out, and there are only two outcomes—ceasefire or escalation." He also pointed out that Trump's tone still revealed a White House eager to end the war, while investors continue to hedge against escalation risks.
Conflicting signals have dominated market movements. Since the war began, Trump has oscillated between claims that "negotiations are progressing well, a peace deal is imminent" and warnings that the U.S. is "prepared to intensify military action against Iran," repeatedly extending deadlines for Iran to reopen the Strait of Hormuz. This chaotic messaging has directly caused severe market volatility, with oil prices fluctuating accordingly.
Last week, the S&P 500 rose 3.4%, posting its best weekly performance since November, as investors bought on dips driven by hopes for a diplomatic resolution. Concurrently, the Cboe Volatility Index climbed from below 20 before the war to around 24 last week.
Mohit Mirpuri, Equity Fund Manager at SGMC Capital, commented, "Trump's escalatory rhetoric over the weekend fits his usual playbook: headline-driven, unpredictable, and designed to apply maximum pressure quickly." He added, "As long as he is in office, markets will need to adapt to this style of policymaking."
The ongoing month-long war and the effective blockade of the Strait of Hormuz threaten to plunge the globe into one of the most severe energy crises in history. Analysts warn that even if a diplomatic breakthrough occurs, markets will struggle to normalize quickly.
Brent crude surged to $109.77 per barrel on Monday, up approximately 50% since the war began on February 28. U.S. West Texas Intermediate crude rose even more sharply, by 66%, reaching $111.2 by 11 PM ET. Although transit volumes have seen a slight recent increase, shipping traffic through the Strait of Hormuz remains 95% below pre-war levels. Before the conflict, nearly a quarter of the world's seaborne oil and a fifth of its liquefied natural gas passed through this strait.
OPEC+ decided on Sunday to increase its May production quota by 206,000 barrels per day, but analysts believe this move will do little to replenish oil supplies, as the war has severely constrained production and shipments from one of the world's largest crude producers.
Mirpuri noted, "Even if the Strait of Hormuz reopens, the damage to confidence and supply chains is already done—things won't return to normal overnight." Rob Subbaraman warned that the war has "lasted long enough to trigger a serious global inflation spike," and further escalation could mean "the inflation shock could quickly morph into a growth shock, bringing demand destruction and full-blown stagflation."
The fixed income market is quietly repricing inflation expectations. The yield on the 10-year U.S. Treasury note rose to 4.362% on Monday, up about 40 basis points from 3.962% before the conflict, hovering near its highest level since mid-2025, as investors have significantly scaled back expectations for Federal Reserve rate cuts this year.
Mirpuri stated, "One of the larger risks currently underestimated by the market is the trajectory of government bond yields. If this geopolitical shock continues to push inflation expectations higher, yields could rise again, tightening financial conditions further at a time when markets are already fragile."
Wall Street strategist Ed Yardeni observed that the fixed income market is repricing government bonds to reflect a sharp deterioration in the inflation outlook, stating, "The bond vigilantes are taking matters into their own hands, tightening credit conditions." He warned, "We cannot rule out a bear market or even a recession now; it all depends on how long the strait remains blocked."
With Tuesday's deadline approaching, markets are expected to remain highly volatile, with investors closely tracking every signal from Washington and Tehran.
A report cited by Axios indicated that the U.S., Iran, and a group of regional mediators are discussing terms for a potential 45-day ceasefire agreement that could lay the groundwork for a permanent end to the war. However, the report also noted the likelihood of reaching even a partial agreement before the deadline remains slim. Buoyed by this news, Japanese and South Korean stock markets rose on Monday, while India's benchmark equity index recorded a decline.
Hiroki Shimazu, Chief Strategist at MCP Asset Management, said, "We are in an event-driven market now, where headline risk dominates intraday moves, and positioning must account for the binary nature of the outcome." He anticipates the parties will move towards de-escalation through Omani mediation, easing tensions by "quietly reducing the tempo of strikes" rather than achieving a definitive solution, and expects markets to remain turbulent in the coming weeks.
Investors are also awaiting a series of key U.S. economic data releases this week. The Fed's preferred inflation gauge, the February Personal Consumption Expenditures (PCE) index, due on Thursday, will provide an early signal of whether the oil price shock is transmitting to U.S. consumer prices.
Spot gold has fallen approximately 12% since the war began to $4,672.03 per ounce, caught between safe-haven demand and headwinds from a stronger U.S. dollar and rising bond yields. A stronger dollar makes dollar-denominated gold more expensive for holders of other currencies, while rising yields diminish the appeal of the non-interest-bearing asset. Chetan Seth, Equity Strategist for APAC at Nomura, concluded, "Near-term uncertainty is clearly extremely high. For most investors, the only course of action at this stage is to wait and see."
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