The long and short of it: Iran has set the markets’ fear gauge flashing

Thursday, 5 March 2026

Greg Boland is market strategy consultant at stock broking firm moomoo Australia and New Zealand.

ANALYSIS: When markets shift from calm to chaos, screens turn red, oil surges and bond yields jump, one number in particular flashes across trading desks: the VIX, which measures expected volatility.

This week, that transition into ‘risk-off’ has been unmistakable. The response across global markets to escalating Middle East tensions and strikes involving Iran has been swift and coordinated. Investors are reducing exposure to risk assets, volatility expectations are rising sharply, and energy markets are repricing supply risk in real time.

The fear gauge is flashing

The CBOE Volatility Index, better known as the VIX, has spiked as traders rush to hedge downside risk. The VIX doesn’t measure fear in an emotional sense but the market’s expectation of volatility over the next 30 days, derived from S&P 500 options pricing. When portfolio managers anticipate turbulence, they buy protection. That demand pushes implied volatility higher, and the VIX rises.

The surge in the VIX has been accompanied by heavier put activity and widening options premiums. That tells us this is not simply algorithmic noise, and institutions that are repositioning.

Historically, geopolitical shocks create sharp but often short-lived volatility spikes. The key question now is whether this remains a contained regional conflict or evolves into something that disrupts energy flows more materially.

Oil is the transmission mechanism

The real economic lever in this crisis is not equities. It is oil.

Energy markets are reacting to the possibility of supply disruption through the Strait of Hormuz, one of the world’s most critical oil chokepoints. On moomoo’s commodities dashboard, the Brent crude forward curve has shifted upward, reflecting higher prices today and across future delivery months.

That forward curve movement is important. When near-term oil contracts spike relative to longer-dated contracts, it signals immediate supply concern. If the entire curve shifts higher, it signals sustained pricing pressure and potential inflation implications.

Energy is embedded in transportation, manufacturing, agriculture and consumer goods. A sustained oil rally feeds directly into inflation expectations. That is where the bond market becomes central.

Treasuries send a mixed message

Traditionally, in a risk-off event, investors pile into US government bonds, pushing yields lower. But this time, the reaction has been more nuanced. Treasury yields are rising at the long end, reflecting inflation risk from higher oil prices, even as shorter maturities remain sensitive to US Federal Reserve policy expectations.

This divergence suggests the market is grappling with two opposing forces: slower global growth from geopolitical instability, and higher inflation risk from rising energy prices.

When inflation concerns dominate, long-term yields rise. When growth fears dominate, yields fall. The current yield movement indicates inflation anxiety is winning, at least for now. That dynamic complicates the Federal Reserve’s outlook. If energy-driven inflation resurges, rate cuts become harder to justify, even if equity markets wobble.

What history says about geopolitical shocks

The chart above provides useful context. It tracks how the S&P 500 has historically reacted to major geopolitical conflicts dating back to 1990 – from the Gulf War and 9/11 to Crimea, Syria, and previous Iran escalations.

What stands out immediately is the pattern. Same-day reactions are often negative and sharp, reflecting emotional repricing and uncertainty. Yet one-month performance has historically skewed positive in many cases. Even after severe shocks such as the September 11 attacks, the index recovered meaningfully in the following month. There are exceptions – notably prolonged or economically structural conflicts – but markets have repeatedly demonstrated resilience once the initial panic subsides.

The current entry, ‘US Strikes Iran’, we now know increased 0.1% in the same day change, with the one month change yet to be determined. But history suggests while volatility spikes quickly, it often compresses just as fast once probabilities become clearer. The market’s first move is fear. Its second move is reassessment.

Global indices turn red

Equity markets globally are reflecting classic risk-off positioning.

From Wall Street to Europe to Asia, major indices are under pressure as capital rotates toward defensives. Declines are broad-based rather than sector-specific – a sign of de-risking rather than fundamental repricing of individual companies.

What happens next?

Geopolitical events create two types of market responses: the initial shock, and the secondary economic impact. The shock is what we are witnessing now, with higher volatility, falling equities, rising oil, and bond-market repricing.

The secondary phase depends entirely on duration. If tensions ease quickly, markets historically recover as risk premiums compress. Volatility falls back, oil stabilises, and equities rebound.

If tensions escalate or energy infrastructure becomes disrupted, the inflationary impulse could persist. That would mean sustained upward pressure on oil, sticky inflation expectations, central banks remaining cautious, and equity valuations compressing.

The forward oil curve and the VIX will be the two most important indicators to watch in coming sessions.

Ups and downs

While oil and defence stocks rallied on Monday, cruises, airlines, hotels, and resorts fell markedly due to travel disruptions. Looking at the past 10-day returns, the S&P 500 leaders have been Axon Enterprises and Dell, up 34% and 25% respectively on great quarterly results, while Netflix is up 27% after giving up on its bid for Warner Bros Discovery.

The laggards have included Blackstone and Apollo Global, down 16% and 14% respectively as funds exposed to private credit see a run on investor funds following Blue Owl’s demise.

Volatility is not the enemy

It is important to remember that volatility itself is not negative – it is simply information.

Investors should expect elevated volatility in the near term. Risk management matters more than chasing returns. Position sizing, hedging strategies, and understanding macro drivers become critical. Geopolitics cannot be forecast with precision. But market reactions can be measured and interpreted, particularly when, as today, the market is speaking clearly.