US-Iran War Fears Send Stock Markets Lower, Fuel Inflation Concerns

Market Turmoil Deepens as Iran War Fuels Inflation Fears

Global stock markets experienced a sharp downturn on Friday, March 21, 2026, as the ongoing conflict involving Iran continued to rattle investor confidence and stoke concerns about rising inflation. Both Canadian, and U.S. Markets saw significant declines, driven by surging oil prices and a reassessment of central bank policies. The sell-off extended a brutal week for equities, erasing months of gains in some cases.

The S&P/TSX composite index closed down 537.57 points at 31,317.41, while south of the border, the Dow Jones Industrial Average fell 443.96 points to 45,577.47. The S&P 500 index dropped 100.01 points to 6,506.48, and the Nasdaq composite tumbled 443.08 points to 21,647.61. These declines reflect a growing anxiety among investors that the geopolitical instability will translate into sustained inflationary pressures, complicating the economic outlook.

The primary driver of this market weakness is the escalating price of oil. Brent crude settled at $112.19 per barrel, a substantial increase from levels seen before the conflict began. This surge in energy costs is directly impacting inflation expectations, leading investors to recalibrate their forecasts for central bank actions. Dustin Reid, vice-president and chief strategist for fixed income at Mackenzie Investments, noted the “risk-off moves” in the market, attributing them to higher energy prices and the resulting inflationary risks.

A significant consequence of these concerns is the dramatic shift in expectations regarding interest rate cuts. Traders have largely abandoned bets on the Federal Reserve easing monetary policy this year, with some now anticipating potential rate hikes. This represents a stark reversal from earlier in the year, when expectations of multiple rate cuts were prevalent. The possibility of higher-for-longer interest rates, or even further tightening, is adding to the pressure on stock valuations.

The impact extends beyond equities. U.S. Treasury yields jumped on Friday as investors sold bonds, reflecting the increased inflation risk. The 10-year yield reached 4.39%, its highest level since July. This rise in yields also has implications for borrowing costs across the economy, potentially dampening economic growth.

The situation is particularly complex given the political dimension. U.S. President Donald Trump had previously called for interest rate cuts, but the current environment makes that outcome increasingly unlikely. The conflict’s economic impact is, in a sense, undermining a key argument Trump has made regarding the benefits of his policies.

While past conflicts in the Middle East have often been followed by market rebounds, the duration and intensity of the current situation will be crucial. Reid suggests that if Brent crude remains at or above $120 per barrel for an extended period, the market’s focus may shift from inflation to concerns about global growth and corporate earnings. This would represent a significant change in the macroeconomic trading environment.

In the Canadian market, most sectors experienced declines, with basic materials being the largest drag on performance. Consumer non-cyclicals were the only sector to post gains. The Canadian dollar, however, has “done OK,” according to Reid, keeping pace with the U.S. Dollar amid safe-haven flows.

Investors are now closely monitoring the duration of the conflict and its impact on oil production in the Persian Gulf. The volatility in oil prices is expected to continue as financial markets attempt to assess the evolving geopolitical landscape. The coming weeks will be critical in determining whether the current market downturn is a temporary correction or the beginning of a more prolonged period of uncertainty.