Global financial markets are undergoing a significant repricing as the ongoing conflict involving the United States, Israel, and Iran enters its second month, driving energy prices sharply higher and unsettling risk assets across regions.

According to a Reuters report, Brent crude is on track for its strongest monthly gain on record, rising nearly 60% amid fears of prolonged supply disruptions in the Middle East.

The surge in crude prices comes at a time when geopolitical tensions remain fluid, with intermittent signals of possible de-escalation failing to anchor investor confidence. While reports suggested that the U.S. administration may be open to ending military operations even if key shipping routes such as the Strait of Hormuz remain partially disrupted, markets continue to react sharply to each headline, reflecting a fragile sentiment environment.

This volatility is most visible in equities. Asian markets are heading toward their steepest monthly decline since 2022, with benchmark indices across Japan and South Korea witnessing double-digit losses. The broader MSCI Asia-Pacific index has dropped more than 12% for the month, underscoring the region’s vulnerability to energy shocks given its dependence on Middle Eastern oil imports.

At the core of the market shift is a renewed inflation concern. Brent crude hovering near $115 per barrel has materially altered inflation expectations, particularly for energy-importing economies. The immediate implication is a reassessment of central bank policy paths. Earlier expectations of rate cuts, especially in developed markets, are being rolled back as investors now anticipate a prolonged phase of elevated interest rates.

Bond markets have responded sharply to this change. Yields on U.S. Treasuries have risen significantly, with the two-year yield posting its largest monthly increase since late 2024. This reflects a broader shift in expectations that central banks, including the U.S. Federal Reserve, may delay monetary easing in response to persistent inflation risks. Federal Reserve Chair Jerome Powell has indicated a wait-and-watch approach, suggesting that policymakers are evaluating whether the oil-driven inflation spike will prove temporary or sustained.

Currency markets have also mirrored this risk-off sentiment. The U.S. dollar has emerged as the primary safe-haven asset, recording its strongest monthly gain in eight months. Major currencies such as the euro and British pound have weakened, while the Japanese yen remains under pressure despite its traditional safe-haven status, indicating a divergence driven by interest rate differentials.

Interestingly, gold prices have also risen, reflecting a dual demand dynamic both as an inflation hedge and a geopolitical risk buffer. However, unlike previous crises, the dominance of the dollar suggests that liquidity preference remains skewed toward U.S. assets.

From a macroeconomic perspective, the current environment presents a dual risk scenario. In the near term, inflation is the primary concern, driven by elevated energy prices. However, if oil prices remain high for an extended period, the risk could shift toward growth slowdown, particularly in Asia and Europe, where energy costs have a direct bearing on industrial activity and consumer demand.