Rare! Global stock markets, bond markets, and gold all plummeted simultaneously. What exactly happened?

Tuesday, as the Middle East conflict escalated, dragging down gold, bonds, and stocks simultaneously, cash became the “king” in global markets. This disrupted the normal interaction between safe-haven assets and risk assets and increased volatility across asset classes.

With Trump issuing threats of “whatever it takes” to strike Iran, market sentiment reversed completely—just a day earlier, markets had been relatively calm based on expectations that the conflict would end quickly. Meanwhile, Iran continued to attack Gulf energy infrastructure and tankers in the Strait of Hormuz, through which one-fifth of the world’s energy shipments pass.

It’s clear that on Tuesday, aside from rising oil prices and a strengthening dollar, major global stock markets, U.S. Treasuries and other government bonds, and even gold—traditionally seen as a safe haven—were all heavily sold off.

“Current market reactions are typical in the face of highly uncertain events,” said Michael Arone, Chief Investment Strategist at State Street Global Advisors.

Arone pointed out that the decline in gold prices—after hitting a four-week high on Monday—showed indiscriminate selling.

“Oil and the dollar are now the only things people want to hold,” he added.

Is it only oil and the dollar rising?

Market data shows that investors flocked further into oil and the dollar on Tuesday. Brent crude rose nearly 7%, and the dollar appreciated against non-US currencies across the board, hitting multi-month highs against the euro, pound, and yen. According to Vanda Research, retail investors are also heavily buying into oil stocks.

Meanwhile, bonds and stocks declined together. On Tuesday, the Nasdaq dropped over 2%, the S&P 500 hit its lowest level in more than two months, and the two-year U.S. Treasury yield briefly reached 3.599%, the highest since late January.

Market analysts note that risk-averse behavior was triggered by factors including: previous excessive optimism about US-Iran conflict, extreme positioning in the weeks before Iran’s attack last Saturday, and inflation pressures from rising oil prices impacting the bond market.

George Adcock, Head of Trading at 36 South Capital Advisors and Deputy Portfolio Manager at Kohinoor Strategy, said, “Historical experience shows that during market stress, cross-asset volatility correlations tend to approach 1.”

Adcock pointed out that developments in the Middle East led investors to price various possible outcomes, causing volatility to spike and putting pressure on crowded positions in assets like oil, gold, and the dollar.

“During January, we observed entrenched negative narratives, extreme positioning, and low volatility. These factors are now unwinding in a reflexive manner, causing significant VaR (Value at Risk) and correlation shocks in many portfolios,” he added.

Generally, when selling spreads across market sectors, breaking the usual negative correlation that provides risk diversification and portfolio protection, a VaR shock occurs.

Cash is king: Market liquidity demand is strong

LSEG Refinitiv data shows that global money market funds saw inflows of $47.9 billion on Monday, the highest since February 17, as investors seek short-term cash tools for safety.

In stark contrast, investors reduced equity allocations, withdrawing $9.6 billion from U.S. equity funds and $9.1 billion from other global equity funds, the largest outflows in over two months.

Morgan Asset Management’s Chief Global Strategist David Kelly said, “There’s an interesting flow of safe-haven funds right now—while the dollar is strengthening, funds are not flowing into U.S. Treasuries or other dollar assets, indicating growing demand for short-term cash.”

Aakash Doshi, Head of Gold Strategy at State Street Global Advisors in New York, noted that billions of dollars have already flowed into listed gold funds this year. Although Monday’s outflows were small, future inflows could be significant.

“The gold market is experiencing profit-taking, and there’s a liquidity demand—investors are using gold as a liquidity hedge to cope with potential margin calls, liquidations, and stop-loss triggers.”

“The key is that when geopolitical shocks or extreme market uncertainty truly occur, cash remains the ultimate safe haven,” Doshi emphasized.

Although no one can predict when uncertainty will subside, JPMorgan’s Kelly expects the dollar rally may not last, especially if conflicts deepen the U.S. fiscal fragility and economic outlook. “ Wars often start with intimidation actions and end in quagmires, which are usually unfavorable for the dollar,” he said.

(Article source: Caixin)