The Conversation:

By Daniele D'Alvia, Lecturer in Banking and Finance Law, Queen Mary University of London

When a conflict escalates, financial markets respond within minutes. That reaction is not just panic or speculation – it is a kind of collective judgement about what might happen next.

Tensions involving the US, Israel and Iran triggered a sharp jump in oil prices when Asian markets opened on Monday (rising by as much as 13% amid fears of supply disruption). Major Gulf indices fell steeply, and in some cases trading was suspended amid volatility.

At the same time, investors moved into so-called “safe-haven” assets. Gold prices rose, and demand increased for traditionally defensive currencies such as the US dollar and Swiss franc.

This may sound like distant noise or random financial moves. In reality though, it is one of the clearest signals we have about how serious investors think the situation with Iran could become.

Markets are forward-looking. They do not only react to what has happened – they try to price what they expect will happen. Here’s how to read the signals.

Oil: the first warning light

Oil is usually the first market to move during Middle East tensions. That is because the region plays a crucial role in the global supply of energy. A particular point of concern is the strait of Hormuz, a narrow shipping route through which roughly a fifth of the world’s oil exports pass.

When oil prices jump, it does not mean supply has already stopped. It means traders believe there is a higher risk that supply could be disrupted.

Think of it like insurance. If the risk of damage rises, the price of insurance goes up immediately – even if no damage has yet occurred. Oil markets work in a similar way. Prices reflect the probability of trouble.

Why does this matter? Because oil affects almost everything. Higher oil prices push up fuel costs. Fuel affects transport. Transport affects food prices and goods on supermarket shelves. If oil remains expensive for weeks or months, it can push inflation higher.

So when oil spikes, markets are signalling that they see real economic risk – not just political drama.

At present, the scale of the oil move suggests markets are seriously reassessing the probability of disruption. The crucial question is persistence. If prices stabilise quickly, investors may believe escalation will be contained. If they remain elevated, markets are signalling expectations of prolonged instability.

Bonds: investors looking for safety

The second place to look is the bond market. A bond is essentially a loan. When you buy a government bond, you are lending money to a government in exchange for interest. US government bonds (Treasuries) are widely seen as one of the safest investments in the world.

In times of uncertainty, investors often move their money into these safer assets. This is known as “flight to safety”. When many people buy bonds at once, bond prices go up and their yields (the interest rate that is paid) go down.

You don’t need to follow bond charts every day to understand the message. If investors are accepting lower returns just to keep their money safe, it tells us they are worried.

If oil prices are rising while investors are piling into safe government bonds, markets may be signalling two concerns at the same time: higher short-term prices and weaker economic growth ahead. That is a difficult combination for any economy. Bond markets, in other words, are measuring anxiety.

Stock markets: how long will this last?

Stock markets reflect confidence in companies and economic growth. When shares fall sharply, it often means investors expect profits to be squeezed or business conditions to worsen. But the key issue is duration.

If stock markets fall briefly and then stabilise, investors may believe the conflict will be contained. If losses spread and persist, it suggests markets expect a longer or more disruptive episode.

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