Daily market update: Shares, bonds and gold hit by Trump 48-hour deadline

The risk dial has been turned up again on the Middle East conflict, causing widespread turbulence on financial markets.

Donald Trump imposing a tight deadline changed the narrative for markets. Up until yesterday, investors were unsettled by activities but hoped the US president would eventually back down.

Trump telling Iran it had 48 hours to open Hormuz or the US would destroy its power plants is a complete U-turn from the president’s remarks last Friday that hinted at winding down military operations in the Middle East.

So far during the current crisis investors have focused on the potential for a short, sharp inflationary shock. That’s an uncomfortable situation, but nothing out of the ordinary. Now the focus shifts to a more serious scenario where any destruction of vital infrastructure in the Middle East could cause major disruption to energy and food supplies on a wider scale, and a notable hit to economic growth with longer-lasting consequences.

The 10-year gilt yield went back above 5%, having last week touched this level for the first time since the global financial crisis. This is the market’s way of saying the outlook for UK interest rates has radically changed.

Three weeks ago, the market expected two rate cuts in the UK this year. We’re now looking at a situation where rates could be hiked four times by the end of 2026, according to market probability data. That has significant consequences for consumer and business spending, for the UK economy, and for public finances as the government’s cost of servicing debt would go up and tighten fiscal headroom.

Bond markets are also moving fast in the US. The 10-year US Treasury yield has gone from 3.95% to 4.4% so far in March, which is a large movement relative to normal conditions. The S&P 500 is down 5.4% over the same period.

Financial market weakness has previously been the trigger for Trump to back down from whatever threats were troubling investors, such as trade wars, and markets will be hoping the latest bond and stock wobbles force the president’s hand once again.

Gold failed to act as a haven, falling 6% as investors sought to liquidate parts of their portfolio, potentially driven by margin calls.

While gold has a strong history of holding value during uncertain times, the prospect of interest rates potentially going up makes the precious metal less appealing. Gold has no yield and is less attractive in an environment where cash might soon offer higher returns.

There is a lot for investors to process, and it feels like some people are selling now and thinking later. It’s possible that market volatility could intensify as the day progresses unless Trump backs down before the 48-hour deadline expires.