Global investors received a stark reminder of how quickly inflation concerns and oil market volatility can return, after US President Donald Trump announced on Wednesday that the interim agreement with Iran to end the war 'is over'.

Inflation-sensitive assets such as bonds and gold retreated as oil prices surged about 5 percent on Wednesday, with markets remaining volatile during Thursday's trading, according to Reuters.

Anika Gupta, head of macroeconomic research at WisdomTree, said it was a 'strong wake-up call for markets'. She added that expectations had pointed to 'oil starting to flow back into markets, and inflation expectations likely declining'.

Everyone is watching oil prices

Oil prices were the first assets affected, jumping as much as 6 percent on Wednesday to their highest in two weeks, following Trump's comments.

However, Brent crude futures, hovering around $78 a barrel, remain far from the $120-plus levels reached over two months from mid-March, which pushed policymakers to confront record inflation levels.

Prices fell quickly after the US and Iran signed a preliminary memorandum of understanding in June, which reopened the Strait of Hormuz, allowing oil flows to resume from tankers that had been stuck in the Gulf, and creating a limited supply surplus.

The key question remains: where will prices go after this slight surplus recedes?

Ships in the Strait of Hormuz as seen from Musandam, Oman (Reuters)

Clinging to hope

These developments came at a sensitive time for stocks, as doubts began to grow about the future of the artificial intelligence sector, with investors questioning whether companies that made billions from AI chips and models will sustain that performance if supply chains improve or demand falls short of expectations.

Since the Nasdaq hit its all-time high on June 1, memory chip stocks have undergone a sharp correction. The memory chip ETF fell about 9 percent, while the Philadelphia Semiconductor Index dropped 3 percent.

In contrast, markets less tied to AI performed much better; the S&P 500, excluding the outsized impact of the largest stocks, rose more than 1.5 percent, while the European STOXX 500, which has limited exposure to AI stocks, climbed 2.4 percent.

Bond yields rise

Bond yields jumped following Trump's comments, influenced by higher oil prices, as markets raised their inflation expectations and investors braced for possible interest rate hikes, reversing the retreat in tightening bets seen in recent weeks.

One-year euro zone inflation expectations rose by 25 basis points over two days to 2.12 percent. Traders also began pricing in additional monetary tightening by the European Central Bank of about 35 basis points this year, compared with 25 basis points on Tuesday.

Trader working on the floor of the New York Stock Exchange (AP)

Meanwhile, markets priced in 36 basis points of tightening by the Federal Reserve and 32 basis points by the Bank of England, according to LSEG data on the fed funds market.

Despite this, markets still expect US consumer price inflation to be around 2.21 percent over the next year, well down from the 4.2 percent level recorded in May.

Short-term bonds, most sensitive to interest rate expectations, were the most affected by market moves.

German and British two-year bond yields rose more than 10 basis points on Wednesday, hitting their highest in less than a month. In the US, an energy-exporting country, the reaction was more muted, with two-year yields rising just 4 basis points.

Volatility resurgence

After a long period of relative calm in recent months, Wednesday’s developments pushed many volatility indicators higher.

The VIX, known as the 'fear index', returned to pre-war levels by early June, aside from a limited spike due to concerns over high-performing tech stocks.

The same applies to bond and currency volatility indices, which had been declining almost continuously in recent weeks before rising on Wednesday.

The only exceptions were equity indices with heavy exposure to the chip sector, such as South Korea and Taiwan, where volatility levels reached record highs.

Employee placing gold bars in the vault of the National Bank of Kazakhstan in Almaty (Reuters)

Gold loses some luster

Gold prices have fallen 23 percent from their level before the war broke out, despite having surged about 70 percent over the previous six months, as central banks, institutional investors, and retail traders flocked to buy the precious metal.

After a slight rise since the start of July, gold has almost returned to the beginning of the month, falling 0.7 percent on Wednesday to around $4,090 per ounce by Thursday.

Gold, usually seen as a safe haven and inflation hedge, initially rose with the outbreak of the Iran war, but quickly dropped sharply.

Instead of safe-haven flows, investors focused on the strength of the dollar and the increased likelihood of central banks raising interest rates, putting more pressure on gold prices.