April 7 (Reuters) - Global markets are experiencing a period of increasing uncertainty ahead of a deadline set by U.S. President Donald Trump for Iran, amid mixed expectations from investors of a ceasefire or continued military escalation, and the impact of each on oil, currencies and risky assets.

Iran showed no sign of yielding to Trump's threat of large-scale attacks on its civilian infrastructure if it did not reopen the Strait of Hormuz by the end of Tuesday, in the biggest escalation yet in this conflict. The Wall Street Journal reported this morning that Iran had severed direct diplomatic channels with the United States.

Trump gave Iran until 8 p.m. Washington time (00:00 GMT and 3:30 a.m. Tehran time) to end its blockade of Gulf oil, a move that has roiled commodity and financial markets over the past few weeks.

David Morrison, senior market analyst at Trade Nation, said, "Markets are dealing with a rather dual situation... ahead of a deadline that could lead either to a surprise resolution or a rapid escalation."

The S&P 500 index fell by about one percent on Tuesday. The dollar and gold also declined, while oil rose slightly.

Here's a look at what might happen next:

military escalation

Citigroup said in a recent note that a prolonged conflict and severe disruptions to oil supplies could push the price of Brent crude up to around $130.

Stock markets will see declines, led by interest rate-sensitive stocks and shares of companies whose performance is linked to the economic cycle, as investors anticipate a sharp economic slowdown and rising inflation.

Pete Molmat of IG North America said that airlines, particularly American Airlines, and travel companies like Carnival are the most vulnerable to the impact of rising fuel costs and declining demand. He added that Palantir and CrowdStrike, on the other hand, stand out as companies combining artificial intelligence and defense, and have the greatest potential for growth if the conflict drags on and volatility increases.

The dollar was one of the biggest beneficiaries of being considered a safe haven during this conflict.

“If expectations shift to higher oil prices for a longer period, the dollar could rise further, as this could increase the inflation and production pressures faced by energy importers,” said Steve Englander, an analyst at Standard Chartered.

The rising dollar may also put pressure on the Japanese yen and increase the likelihood of intervention by the Bank of Japan.

Analysts at UniCredit suggested that the Bank of Japan would intervene if the dollar-yen exchange rate rose rapidly above the 160 level, reaching its highest level since July 2024, approaching 162. The yen was last trading at 159.82.

Peace agreement

In recent weeks, Trump abruptly reversed similar threats, citing what he described as productive negotiations with unnamed figures in Iran, but Tehran denied holding any substantive talks.

The Standard & Poor's 500 index has risen by about four percent since hitting a seven-month low in late March, fueled by hopes of a deal to end the war.

Shares in defense, fertilizer, and energy companies, which saw significant gains due to expectations of continued conflict and rising production costs, may relinquish some of their gains. Meanwhile, airlines and cruise lines, which were severely impacted and are sensitive to high oil prices, may recover some of their losses as fuel prices decline and travel demand forecasts stabilize.

A de-escalation of the conflict in the Middle East would increase expectations of interest rate cuts. However, rising oil prices and broader inflation concerns have led investors to anticipate no immediate monetary easing measures this year.

A further extension of Trump’s deadline for Iran could stimulate short-term risk appetite as investors anticipate an agreement is imminent.

Analysts expect Brent crude to remain at its current range of $110 a barrel amid continued supply disruptions due to the Strait of Hormuz remaining effectively closed.

Gold may also remain at its current levels if the uncertainty that is supporting safe-haven demand persists for an extended period. The precious metal has fallen 12 percent since the start of the war, weighed down by the strength of the dollar.