US President Donald Trump's recent threats to bomb Iran "back to the Stone Age" have significantly increased tensions in a conflict now entering its fifth week, disappointing investors who were hoping for a swift resolution. This ongoing war is impacting oil supplies and contributing to rising inflation.

Global markets reacted negatively on Thursday, April 2, with stocks and bond prices falling, oil prices surging, and the dollar strengthening as Trump provided little clarity on when the conflict might conclude.

However, US markets saw a rebound approaching midday, spurred by a Bloomberg report indicating that Iran was negotiating a protocol with Oman regarding traffic through the Strait of Hormuz.

After opening sharply lower, the S&P 500 and Nasdaq Composite managed to reduce their losses, though they remained in the red, while gold prices decreased by 1.4 percent.

US crude oil prices jumped nine percent to $108.88 after earlier rising by double digits, marking their highest level since March 9 and the largest price increase since 2020.

Trump stated that the US military was nearing its objectives in Iran but would continue to target locations there for the next two to three weeks. He did not clarify how the critical shipping route of the Strait of Hormuz, currently obstructed by Iran, would be reopened.

"There wasn't much new in the speech itself, apart from the confirmation that they will keep bombing for the next two to three weeks," noted Mike Houlahan, director of Electus Financial Ltd in Auckland.

"This extends the timeline for resolution," he added. "The next question is whether this extension will add more pressure on the fuel supply chain."

Investor Disappointment

Investors had hoped for a quick resolution to the conflict after Trump's earlier comments this week led to a rise in global stocks and a decline in the dollar. However, Wednesday's address highlighted the likelihood of a prolonged military engagement.

Traders who had increased their risk exposure quickly exited those positions ahead of an extended weekend, with technology stocks, banks, and private equity shares generally falling, while energy stocks climbed along with crude prices.

Concerns over oil supply disruptions and their inflationary effects have been at the forefront of financial markets. Trump's remarks left ambiguous whether US military operations could conclude before Iran reopens the Strait of Hormuz.

Iran's control over this crucial waterway has triggered what many analysts describe as the worst global energy crisis in history. Brent crude prices were reported to be up over eight percent, reaching around $109 per barrel.

"With no plans to reopen the Strait of Hormuz, which has been effectively closed, oil prices are likely to remain high indefinitely," stated Matt Simpson, senior market analyst at Stonex in Brisbane, warning that markets might soon face "the next round of inflation."

Trump's speech and the prospect of ongoing oil supply disruptions have rekindled market fears of stagflation, characterized by high inflation and sluggish growth, which had already unsettled markets in March, according to analysts.

New Bank of Japan board member Toichiro Asada noted that Japan could face stagflation risks stemming from the Iran conflict, which would complicate monetary policy responses.

"The key question on every investor's mind is 'when will this end?' This uncertainty is driving market volatility," said Russel Chesler, head of investments and capital markets at Vaneck in Sydney.

"We are now looking at a potential stagflation scenario, with lower growth and rising inflation expectations."

On Thursday, US Treasury yields fell after initially rising due to concerns that higher inflation might hinder any easing of monetary policy. The yield on the 10-year Treasury was recorded at 4.30 percent, down three basis points.

Market volatility is expected to persist as investors monitor developments over the next two to three weeks. Analysts anticipate that the dollar and oil prices will rise in the short term as investors adopt a risk-averse stance.

The CBOE Volatility Index, Wall Street's fear gauge, increased by 2.6 percent to 25 after reaching 27 earlier in the day.

Since the conflict began in late February, the dollar has benefited from a flight to safe-haven assets, and it regained strength against other major currencies, reversing two days of losses. It rose approximately 1.6 percent in the first quarter, marking its largest quarterly gain since late 2024.

"The dollar has edged higher ... and given our expectations for the war to extend into at least June, it can certainly climb further," suggested Carol Kong, currency strategist at Commonwealth Bank of Australia.

"It's hard to feel optimistic about the war ending soon, especially since Israel and Iran are also key players; it’s not just the US involved."

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