Since our mid‑February edition, global equity markets have slipped modestly, with major indices declining in the low-to-mid single digits. Despite heightened conflict in the Middle East, the global economy has remained resilient – although it is now moving into a more fragile and constrained phase.
Growth expectations have been revised down slightly, while inflation risks are creeping higher. The main drivers are geopolitical tensions, trade tariffs, and rising energy prices.
Over the past week, Wall Street and other global markets ended lower. Investors reacted to volatile swings in crude oil and liquified natural gas (LNG) prices, ongoing uncertainty, and signals from the US central bank that interest rates may stay higher for longer.
As the conflict in Iran escalates, energy prices have risen sharply. This has a direct impact on everyday costs, from fuel at the pump to food prices.
These increases affect household spending, manufacturing costs, and overall consumer confidence. Central banks are closely watching these inflationary signals.
How long the conflict lasts will be key. A prolonged disruption would likely push inflation higher and keep markets under pressure. A swift ceasefire, on the other hand, could improve the outlook rapidly.
With no clear signs of de-escalation, the geopolitical backdrop remains challenging. A major concern is the Strait of Hormuz, a critical route for around one-fifth of the world’s oil supply.
If this route were fully reopened and stable, energy prices could fall quickly, easing pressure on global markets and energy-importing nations.
Historically, sharp increases in oil prices have triggered sell-offs in equity markets, as seen during the Gulf War (1990–91) and the start of the Russia-Ukraine conflict in 2022. In both cases, markets recovered once prices stabilised.
Today, however, the dynamics differ: oil has risen over 40%, yet energy stocks have climbed only around 8%, implying that investors expect the price spike to be temporary. That assumption could prove optimistic – particularly given recent attacks on key LNG infrastructure in Qatar, where repairs may take significant time even if the Strait reopens.
Energy importers, particularly in Europe and Asia, have been hardest hit. By contrast, the US – largely energy‑independent – has weathered the shock relatively better, reflected in its comparatively resilient equity markets.
At the start of the year, sentiment was much more positive, supported by stronger growth and earnings. That optimism has faded.
After four weeks of conflict, ongoing attacks on key infrastructure and a shifting political rhetoric, markets are unsettled.
Recent press has added to the uncertainty. President Trump has threatened to strike Iranian power plants unless the Strait of Hormuz reopens – extending his initial 48-hour ultimatum to five days – while also suggesting the US and Iran have held talks, a claim Iran passionately denies (even aping Trump and labelling it “Fake News”).
Iranian President Masoud Pezeshkian has described US threats as “desperation,” insisting that the Strait remains open “to all except those who violate our soil.”
Major central banks in developed markets have kept interest rates unchanged but have siganlled readiness to act should the energy shock spill over into broader inflation.
While the Middle East dominates headlines, trade tensions between the US and China are resurfacing. China has pushed back against the US’s new Section 301 investigations into industrial overcapacity. US officials have suggested these probes could result in new tariffs on imports from China, India, Japan, South Korea, Mexico, and the EU as early as this summer.
This adds another layer of uncertainty for global markets at an already fragile time.
While the current environment is challenging, history suggests that staying invested and maintaining a diversified portfolio tends to pay off over time.
More cautious investors may choose to reduce risk in the short term, particularly as inflation pressures build. However, periods of uncertainty often create opportunities as well.
As the situation develops, volatility is likely to remain elevated.
As John F. Kennedy said in 1961:
“Mankind must put an end to war, or war will put an end to mankind.”
A reminder that stability and cooperation remain essential for both markets and the global economy.
