A broad-based selloff triggered by war and oil
What began as a strong start to 2026 — with emerging markets rallying on a weaker dollar, gold at record highs, and central banks easing — came to an abrupt halt when the United States and Israel launched joint strikes on Iran on 28th February. Iran’s response was swift and brutal in its economic consequences: the closure of the Strait of Hormuz, through which roughly a fifth of the world’s seaborne oil passes daily. The International Energy Agency called it the largest supply disruption in the history of the global oil market. Brent crude surged to near $120 a barrel. Inflation expectations reset sharply higher, and almost every major asset class sold off simultaneously.
Emerging markets bore the brunt of the selloff, falling -13%, exposed as they are to oil prices and US dollar strength. While Australian small companies weren’t much better, falling 11%.
As is often the case, gold provided limited protection in the immediate aftermath of the attacks, as investors made a dash for cash. From nearly $5,400/ounce on 2nd March the gold price fell more than $1,000 over the following three weeks, however it has slowly begun to recover as investors have switched their focus to fears of inflation.
For fixed income, US Treasury yields rose 49 basis points in March, with the two-year yield rising 53 basis points as investors pushed back expectations for Federal Reserve rate cuts in 2026. Global bonds fell 3.3% for the month. The FOMC held rates steady at 3.50%–3.75% but the mood had shifted: the number of participants who saw downside risks to growth rose from 8 to 14 out of 19 members. Central banks globally are now navigating the uncomfortable combination of higher near-term inflation and weaker growth — the policy-maker’s least favourite scenario.
Relief rally offers breathing room, but risks remain
As we move into April, the picture has shifted again. After weeks of increasingly inflammatory rhetoric with Iran, Trump threatening to “bomb them back to the Stone Age” – a phrase made famous by former head of the US Air Force Curtis LeMay – and “a whole civilisation will die tonight”. The irony was lost on Trump, as not only was LeMay stating his preferred strategy during the Vietnam War, but he was also responsible for dropping nuclear bombs on Japan during WWII, supposedly the very thing the US is trying to avoid.
Nonetheless about 90 minutes before Trump’s deadline expired, the president announced a two-week ceasefire, a last-minute pivot that triggered a sharp relief rally, with WTI crude plummeting 15% and S&P 500 futures rising roughly 2%. Brent crude is nonetheless still some 50% above pre-war levels, and the ceasefire is by no means a peace agreement, with the wide gap between the two sides’ stated positions a reminder that the next fourteen days will be anything but straightforward.
The key question for April is whether this ceasefire holds and, if so, how quickly second-round inflation effects unwind. If oil drops sustainably below $100 — the RBNZ’s base case assumption — central banks regain room to manoeuvre. If it doesn’t, the hiking cycle that markets briefly priced in over March may yet arrive.
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