Middle East Conflict: Counting the Shocks on the Global Economy and Impact on Financial Markets

It’s Day 11 of the war and financial markets have been roiling by the impact of the Iran War, with disruptions to the energy market in focus. For oil and gas, our base case scenario is a two-week disruption, and we project Brent crude averaging $90/bbl over March and April and European gas (TTF) at €50/MWh, with severe, prolonged outages potentially driving Brent to $119/bbl and TTF to €108/MWh over the same period. Whilst the magnitude of any oil price spike can be moderated by strategic reserves, gas markets will need to balance via demand destruction. Metals are also affected as supply shocks are driving up aluminum prices and creating significant supply tightness for sulfuric acid, which is crucial for base metal extraction like copper and nickel. While gold initially surged as a safe haven, price will likely return to pre-war levels if the conflict is short, though a prolonged war could lead to renewed price increases due to inflation. Beyond metals, disruption of transportation also threatens freight and air travel demand.Stagflation risks are on the rise as duration of the conflict drags on, with growth sagging, and terms of trade deteriorating for oil importers. By region, other than the Middle East, Asia is most directly affected, followed by Europe via higher energy prices, and the Americas. Asian economies are vulnerable to a prolonged conflict through higher energy and food prices, transportation disruptions, reduced remittances, and tighter financial conditions. Europe faces inflation and growth risks, with impacts varying by duration: intermediate ones suggest sustained price hikes and potential rate hikes, while severe, prolonged conflict risks stagflation and economic slowdown requiring tighter monetary policy. For the US, a prolonged conflict would lead to persistent US inflation and a severe growth slowdown, prompting the Fed to implement four rate cuts. Latin America would face weaker growth, higher inflation, and FX depreciation.Geopolitical shocks are generally short-lived and create more noise than lasting trends for most asset classes. Since the war, US risk assets have outperformed, while Asian and emerging markets (EM) have lagged. If the conflict remains brief, a reversal towards European and EM is expected, with US equities to perform in line with European equities in 2026. In FX, investors sought safe havens, bidding up USD and CHF, but we expect longer-term dollar weakening, favoring EUR/USD recovery and USD/JPY. In rates, we expect widening Eurozone sovereign spreads (France, Italy) and a favored short position in German short-term bonds (Schatz). In real estate, turmoil in the Middle East may favor safe-haven Western European and Asia markets.