SA will not be spared as Middle East crisis pushes markets to breaking point

Carl von Clausewitz identified “the fog of war” as an inescapable feature of armed conflict. He could not have anticipated that its most bewildered victim of the current calamity playing out in the Middle East would be the dithering president who started it.

Enveloped in confusion, US President Donald Trump seems to change his mind every few minutes in a nauseating stream of contradictory messages on social media. Not only can he not decide whether to escalate or de-escalate, or perhaps escalate to de-escalate (whatever that means), but even his objectives of this war keep changing. He can’t even seem to remember why he started the war in the first place.

For investors and economists this chaos compounds an already formidable challenge. The effects of such a war on a medium sized emerging economy like SA are, in ordinary circumstances, hard to understand. With Trump in power, it is effectively impossible. But, through the ever thicker fog, three structural shifts are starting to appear.

Sovereign bond markets blowing up

The first pertains to sovereign bond markets. While in a more typical bout of market volatility one might expect bond prices to rally in a risk off environment, soaring oil and energy prices and the spectre of stagflation – effectively ruling out interest rate cuts and bringing back the prospect of hikes – have roiled fixed income. It shows how an energy supply crisis can morph into a bond shock, hurting government finances and increasing borrowing costs for everyone.

One extreme example is the wild ride of UK government bonds over the past few days. Last week, the Bank of England opted as fully expected to keep rates on hold. Yet, markets had expected at least one of the nine members of the Monetary Policy Committee to dissent in favour of a cut.

Instead, the vote was unanimous for a hold; scared by the prospect of stagflation, the central bank quietly abandoned its previous guidance that the next move would be downward. The bond market exploded; two-year UK bond yields climbed to about 4.6%, their highest in more than a year, while 10-year yields breached 5% for the first time since the financial crisis of 2008.

SA too has been hammered. Years of the SA Reserve Bank and National Treasury being rewarded for their hawkishness on inflation and fiscal prudence have come undone in weeks. After the 10-year South African bond yield peaked at close to 13% in 2023, it had traded all the way down to under 8% only last month (bond yields move inversely to prices).

The positive effects of this, in particular mortgage availability and the opportunity to increase government spending on vital infrastructure, were profound. All that has evaporated since the missiles and bombs started flying. The SA 10-year benchmark interest rate has shot up to 9.5% and shows no sign of calming down as the calamity escalates.

Equities and the end of Taco

Financial markets had, for much of the Trump era, operated according to an informal but highly profitable calculation, that regardless of how much chaos he might have caused, “Trump Always Chickens Out”, or Taco. Every sell-off induced by presidential carnage was a buying opportunity, because Trump invariably retreated before doing lasting damage. In 2025, this logic was consistently vindicated. After a bruising few days following “Liberation Day” tariff announcements last April, the S&P 500 surged and never looked back.

The decision to enter an all-out war with Iran has shattered that framework. Unlike tariffs, which can be suspended with a social media post, existential wars of survival follow their own unpredictable logic. The market is now moving not on Trump's mood, but on drone and missile strikes against energy infrastructure and the precarious trickle of tankers through the Strait of Hormuz.

The recovery that investors had come to expect as a matter of course looks, this time, elusive. Regardless of how much Trump might want out, Israel and Iran are showing no such inclination. It now looks like it takes two to Taco.

South African equities have experienced the same dynamic, albeit amplified. After falling 10% on Liberation Day last April, the JSE All Share Index staged a remarkable rally – rising nearly 50% over 11 months on the back of surging gold stocks and a tentative recovery narrative for the domestic economy. That narrative has since collapsed with brutal speed. The index has fallen roughly 20% in the current month alone, partly on the drop in gold mining stocks.

The paradox of gold

Which takes us to the next and most surprising market dynamic. For the past 11 months up to February, gold had been one of the great investment stories of 2025 and early 2026, rising 80% to successive record highs on a combination of inflation anxiety and a broader scepticism about dollar supremacy, the so-called “debasement trade”.

One might have supposed that a Middle East crisis would further cause investors to rush into gold. War, inflation and geopolitical chaos are, after all, precisely the conditions in which gold is supposed to shine.

The precise opposite has happened. Up to Monday, gold fell for nine consecutive trading days, posting its largest weekly decline since 1983. Only in the last week, spot prices have plunged almost 15%, at one point touching $4,100 an ounce. One explanation is counterintuitively logical; while surging energy prices are inflationary, they have raised expectations for interest-rate increases by the Federal Reserve and other major central banks. Higher rates are net-net negative for a non-yielding asset as the opportunity cost of gold increases.

There may be a second, more mechanical force at work. As equity and crypto portfolios suffer, retail investors facing margin calls are liquidating whatever they can – and gold, being liquid, is among the first to go. The result is that the one asset class that should, theoretically, be performing well in a crisis has lost its lustre as a hedge, possibly for a long time to come.

The sell-everything trade is back

That markets have been brutal since this war started is self-evident. Indeed, the only place to hide has been cash, but with inflation rising on the back of oil prices even that is being eroded at a faster rate.

Trump and Israel’s folly will leave no one unscathed. The list of those who cannot afford a drawn-out war in the Middle East is long; workers who will face rising unemployment as growth falters, retirees watching their pensions and savings diminish, commuters struggling with spiralling transport costs.

The effects of a sustained shock will not stay in financial markets. It will affect everyone. The stakes could not be higher. DM

Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.