Up, or down? War scrambles financial markets' signalling efforts

• The correlation between two-year Treasury yields and the S&P 500 collapsed to -0.8 from a five-year average of 0.23, as bonds failed to act as traditional hedges during simultaneous inflation and growth shocks
• Gold has lost its safe-haven status, falling 10% below pre-war levels and moving unusually closely with equities (correlation of 0.55 vs. five-year average of 0.22), while bitcoin's correlation to stocks hit a record 0.96
• The euro remains near $1.17 despite expectations of two ECB rate hikes versus a Fed cut, breaking the normal relationship between interest rate differentials and currency movements

Summary: War Disrupts Traditional Financial Market Correlations

A Middle East conflict has fundamentally disrupted traditional asset correlations, leaving investors navigating markets with unreliable indicators, according to Reuters analysis.

Key Breakdown by Asset Class:

Stocks and Bonds: The one-month rolling correlation between two-year Treasury yields and the S&P 500 has collapsed to -0.8 from a five-year average of 0.23. Similar patterns emerged in European markets. Investors did not seek safety in sovereign bonds during March as traditionally expected, complicating the "safe haven" narrative.

Gold and Safe Havens: Gold has declined 10% from pre-war levels, abandoning its traditional safe-haven role. Its correlation to stocks rose to 0.55 from a five-year average of 0.22, while its typical negative correlation to the dollar weakened to -0.19 from -0.4. Bitcoin's correlation to stocks hit a record 0.96, eliminating its diversification benefits.

Currencies: The euro trades around $1.17 despite expectations for two ECB rate hikes versus potential Fed cuts—a breakdown of the normal interest rate differential relationship. The correlation between euro/dollar and rate differentials shifted to 0.5 from an average of -0.3.

Commodities and Inflation: Oil prices surged 40%, yet five-year-five-year forward inflation swaps fell to 2.4% from 2.45%, showing a -0.7 correlation versus a five-year average of 0.2—indicating inflation expectations have "become increasingly divorced from fundamentals."

Market Outlook: BMO's Mark McCormick warns the next 3-6 months won't resemble "pre-conflict normal," with shifting correlations and rising drawdown risk as "something new is forming" in global markets.