Stocks, the dollar and fear indexes unwind Wall Street's war.

Financial markets are diverging as the conflict in the Middle East enters its eighth week.

The U.S. stock market has?wiped out the losses since the beginning of the war. But oil prices remain punishingly high and are dragging down both government bonds as well as gold.

Also, there are dramatic differences in emerging markets. Brazilian markets have risen and China has seen healthy inflows. However, smaller, energy-dependent economies are struggling.

Markus Hansen said that the U.S. could manage an oil price shock this long, but Asia was more vulnerable. Hansen said that he used the drop in prices to buy some cheap stocks.

He did say, however, that higher prices for oil would cause central banks to delay interest rate reductions.

A SHINING STOCK MARKER ON A HILL In the U.S., the benchmark S&P 500 has recovered to its pre-war level. It is up 10% since a low on March 30.

The index closed Tuesday at 6,967.38, a close above the February 27 close, just before Israel and the U.S. began airstrikes against Iran. The last week's ceasefire, and the hope that peace talks will resume, are helping. Citi and BlackRock are also bullish about U.S. stocks, citing expectations of resilient corporate earnings in the tech sector.

This is a remarkable rebound. The index fell the most in March since the tariff crisis of April 2025. VIX, Wall Street's "fear gauge", is now back to pre-war levels. It spiked to a 10-month high over 35 last month. The stock market volatility is a boon to brokers. Goldman Sachs' and JPMorgan’s first-quarter profits were?helped? by increased trading income.

PHYSICALLY COMPLICATED

The oil prices have fallen from their highs in March, but are still around $100 per barrel, which is 40% higher than where they were at the end of February.

Refiners are paying over $140 per barrel for North Sea crude, for "near-term deliveries". The rate of return to the wartime pre-war period is almost doubled.

Brent futures, which are contracts for delivery in the second half of this year, have given some investors comfort. They believe that a resolution will be reached and prices will reach around $83. Even those contracts are higher than before February 28. The December 2027 futures and the March 2027 are both 18% higher.

Bonds are being impacted by the high oil prices. The situation on bond markets is different from that of stocks. The cost of borrowing from the U.S. for Europe and Japan is well above the levels before the war.

Energy prices that are higher for longer fuel inflation, and make central banks more hawkish compared to before the war. The U.S. Treasury two-year yield is around 40 basis points higher than late-February levels, at around 3.75 percent. However, it has fallen from its March peak. Britain's yield on two-year bonds is 75 basis points higher. Gold has also struggled and is almost 10% lower than pre-war levels. Analysts claim that investors took profits in March by dumping their best-performing assets.

CURRENCIES INCLUDED

The dollar has largely returned to its pre-war level, and the dollar index (which tracks the U.S. dollar against six other currencies) is just slightly above the closing price of February 27.

The greenback's gains post-war were around 3%, but it has?given almost all those back as markets are focused on the hope for a solution that could help limit the worst economic fallout.

Investors have reacted to the inflationary shock by 'pricing up rate increases in the Eurozone and Britain but not the U.S. because their currencies are supported.

The euro has recovered almost all the losses it suffered in recent weeks. And the pound, which was $1.136 before the conflict, is now back to its pre-conflict level.

Exporters of ENERGISED Energy

As asset classes have diverged, so too have regions. Europe imports a large amount of energy, unlike the U.S. This has caused the STOXX600 to fall 2% since pre-war and Germany's heavily industrialized DAX to drop nearly 5%.

Other countries that import fuel, like Japan and Korea, also have sharply reduced equity values. However, unlike the poorer nations, these nations can still obtain fuel, even if it is expensive.

The import-dependent Philippines declared a national crisis, and the small stock market there has fallen?8% in value since the war.

Brazil, on the other hand, is a major oil exporter. Its main equity index has risen 5% over pre-war levels and the real currency is up 2.7% against the dollar.

Norway's crown has also gained more than 1% against the dollar in developed markets since the start of the war. China, a major oil importer, also has a large reserve, which along with low inflation in the country, helped to boost its government bond market and reduce yields. Green energy stocks in China have also risen.

(source: Reuters)