The ongoing conflict in Iran has caused significant disruption in global financial markets. Investors and market makers are adopting a more conservative stance toward risk-taking, impacting core markets from U.S. Treasuries and gold to foreign exchange. Trading has become more difficult and transaction costs have risen noticeably, a development that is drawing close attention from regulators.
Geopolitical uncertainty stemming from the war, combined with disruptions to energy supplies, has heightened market volatility. Market makers are reluctant to take on large positions, making it harder to match buyers and sellers.
Gold has experienced a sharp correction over the past month after reaching record highs earlier in the year. During European trading hours on Monday, March 30, spot gold traded around $4,530 per ounce, up approximately 0.8% for the day. Despite this rebound from recent lows, prices remain significantly below levels seen at the start of the month, indicating a period of high volatility and market adjustment. Geopolitical tensions, inflation expectations, and the direction of the U.S. dollar continue to be key influencing factors.
Rising Trading Costs and Liquidity Tightening Over the past four weeks, investors have frequently encountered difficulties obtaining timely quotes or executing trades smoothly. Concerned that large positions could quickly turn into hard-to-close loss-making positions, market makers are asking traders for more patience and are increasingly breaking large orders into smaller lots for execution.
Rajeev De Mello, Chief Investment Officer at GAMA Asset Management, noted that bid-ask spreads have widened significantly, leading market participants to generally reduce their position sizes. This liquidity crunch is amplifying price swings, creating a negative feedback loop.
Visible Strain in the U.S. Treasury Market Rising inflation risks are deterring investors and hitting the U.S. Treasury market hard. Data from Morgan Stanley shows that the bid-ask spread for newly issued two-year Treasury notes widened by approximately 27% in March compared to February, indicating that dealers are demanding higher premiums for assuming risk.
Tom di Galoma, Managing Director of Global Rates Trading at broker-dealer Mischler Financial, pointed out that losses suffered by many institutions in the Treasury market have led to reduced participation from both buyers and sellers, further impairing liquidity. Eli Carter, a U.S. rates strategist at Morgan Stanley, emphasized that while trading volumes remain high, a significant portion consists of position-closing or stop-loss trades.
European Hedge Fund Selling Amplifies Volatility In Europe, rapid selling by hedge funds in the bond market has acted as a volatility amplifier. The Bank of England is particularly focused on this risk, as hedge funds now account for more than 50% of trading volume in UK and eurozone government bond markets.
Hedge funds have suffered substantial losses on trades betting on Bank of England rate cuts, a steeper yield curve, and maintaining narrow spreads between Italian and German government bonds. Daniel Aksan, Co-Head of EMEA Rates at Morgan Stanley, reported that liquidity in the short-term interest rate futures market had at one point shrunk severely to about 10% of its normal level, reminiscent of conditions during the pandemic.
Market Maker Absence in the Gold Market Gold, a traditional safe-haven asset, has seen a significant pullback this month following a record rally in 2025. Mukesh Dave, Chief Investment Officer at global arbitrage fund Aravali Asset Management, observed that on some trading days, market makers were entirely absent, indicating an extreme unwillingness to take on any trading risk.
Dave's comments reflect the prevailing risk-averse sentiment: "Right now, they don't want to make money or lose money. If they had a choice, they wouldn't be in the market at all."
Analysis of Market Risk Transmission Mechanisms Investors' rush to de-risk and move into cash is thinning the ranks of buyers, further fueling market makers' hesitation. A combination of factors—sharp sell-offs in European bonds, concentrated hedge fund bets going wrong, and rising inflation expectations—is creating multiple pressures that collectively drive up trading costs and reduce market depth.
While trading秩序 has remained relatively stable so far, a further escalation of the conflict or persistently high energy prices could worsen the liquidity crisis.
The duration of the conflict and progress in peace talks will be critical variables determining the pace of financial market recovery.
As of 16:25 Beijing time, spot gold was trading at $4,532.14 per ounce.
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