What to watch in the week ahead

• Hostilities between the US and Iran intensified last week, contributing to volatility in energy markets and a further decline in global equities. The MSCI All Country World index is now down 5.5% since the first strikes on Iran on 28 February. This week, investors will be hoping for deescalation.
• It was a volatile week for energy markets, with investors growing more concerned over the impact of the closure of the Strait of Hormuz on global oil and natural gas supplies. Markets will be on the alert for updates on whether the US will make progress in its efforts to open up the Strait.
• Most of the world's major central banks hold policy meetings this week, including the Federal Reserve, European Central Bank, and Swiss National Bank. What message will central bank officials send about the potential impact of the Iran conflict on inflation, growth, and monetary policy?

Will there be a de-escalation in the conflict between the US and Iran?

Developments in the Middle East have been dominating markets, with investors shifting between pessimism and optimism over how quickly the conflict can end and when the normal flow of energy will resume. These will remain the critical questions this week.

The tendency at the end of last week, and over the weekend, was toward escalation. Iran’s new Supreme Leader stated that the Strait of Hormuz —through which around a fifth of the world’s crude travels—will remain closed. Iran has said it would “not allow even a single liter of oil” heading for nations involved in the strikes to pass through the Strait amid attacks on shipping and reports from the New York Times that the nation is laying mines in the waterway. Iran also warned it would strike energy assets in the Gulf, calling on nations in the region to close US military bases. From the US side, President Trump further dampened hopes of an imminent end to hostilities on Friday, saying the US had “plenty of time” to achieve its goals in Iran, having said on Monday that the war was “very complete, pretty much.” Over the weekend he also called on other nations—including China and the UK—to send ships to support US efforts to reopen the Strait.

This week, investors will be hoping for a more conciliatory tone from either side. Our view is that recent volatility presents a dilemma for investors, forcing them to weigh the risk of a sustained interruption to energy supplies against the potential for a sudden de-escalation that leads to a swift rebound. Our base case remains that this crisis will not have a eaningful impact on where markets trade over the long run. For welldiversified, long-term investors, our recommended strategy is simple: Stay invested. But the risks of a more durable disruption have risen, and investors looking to navigate the crisis more tactically can consider gradually reducing risk in three main ways as the crisis continues, including adding hedges, ensuring portfolios are diversified, and cutting cyclical exposure in equities and risky credit.

What comes next for the price of oil?

Uncertainty over the outcome of events in the Middle East caused volatility across markets. This was most evident in the price of oil, which reached an intraday high during the week of USD 120 a barrel and a low of USD 81/ bbl—a range of close to 50%. The International Energy Agency, established in the wake of the 1973 oil embargo, said recently that crude markets were suffering “the largest supply disruption in history.”

The worry is that if regular shipping through the Strait of Hormuz does not resume, oil prices will continue to increase until demand is compromised. Investors will be looking to see this week whether energy markets gain any relief from such volatility or whether prices continue to trend higher.

We see four key questions: First, how soon can the conflict be resolved? Second, if hostilities continue, will the US make progress in escorting oil tankers through the Strait? Last week, US Energy Secretary Chris Wright predicted this could happen by the end of the month—though the US is currently “simply not ready.” Meanwhile, will Iran further step up efforts to discourage shipments through the Strait? Third, will we see further efforts by regional oil exporters, notably Saudi Arabia, to transport their oil through alternative routes? Saudi Arabia has been diverting record volumes through its Red Sea port and investors will be looking to see how sustainable this is. The UAE also has been boosting shipments via a route that avoids the Strait.

Fourth, will we get further news on the release of strategic government reserves to cushion the supply disruption? Last week. the International Energy Agency announced its members would release a record 400 million barrels of oil, more than twice the 182 million deployed after the Russian invasion of Ukraine in 2022. Investors will be looking to see if this can ease concerns in the market amid falling inventory levels at refineries.

Our base case is that oil prices will remain elevated in the near term, as the Strait remains closed. We expect Brent to trade around USD 90 a barrel by the end of June, moderating from USD 106/bbl at the time of writing. Within our active commodity strategy, we have moved energy to moderately overweight, given upside risks to the oil price in the short term. However, assuming the conflict is not sustained, we expect the price of Brent to decline to around 85 USD/bbl by the end of September and to USD 80/bbl by the end of March 2027. That compares to a level of around USD 70/bbl ahead of the airstrikes on Iran.

Will central banks react to the inflation risks posed by the Iran conflict?

The bulk of the world’s top central banks hold policy meetings this week, providing an opportunity to respond to the inflationary risks posed by the Iran conflict. The lineup includes the Federal Reserve, European Central Bank (ECB), Swiss National Bank (SNB), Bank of England (BoE), Sweden’s Riksbank, and the Bank of Canada, so there will be plenty for investors to digest. Economists are not expecting any of these institutions to adjust policy or to seek to preempt any rise in inflation that might result from disruptions to energy supplies.

But investors will be on the alert for more hawkish statements. Leading central banks will be eager to avoid a repeat of 2022 when the Russian invasion of Ukraine drove commodity prices and inflation higher. Back then, officials faced criticism for reacting too slowly.

Still, we expect central bankers to remain circumspect, sticking to a more neutral message about the need for “vigilance” on price pressures. Several ECB officials last week already used such language—including Bundesbank chief Joachim Nagel.

We see several reasons why central bankers will avoid a knee-jerk reaction. Economic conditions in 2022 when Russia invaded Ukraine were different. Inflation was already elevated—at close to 6% in the Eurozone and 8% in the US—amid rebounding demand after the end of COVID-19 shutdowns. At present, inflation is close to, or at, central bank targets. The US core consumer price index for February, released last week, came in at an annual 2.46%, the lowest since early 2021. Central bank policy rates in much of the world are already moderately restrictive, reducing any immediate need for hikes to contain inflation pressures. Finally, many nations are more prepared for energy shocks than in 2022, following a growing focus on energy security, efficiency, and renewables. In Germany, for example, industrial production for energy-intensive industries is down 22% since the end of 2021, versus an 8% drop for non-energy-intensive industries.

So, a commodity-driven rise in prices could cause central banks, such as the Fed or Bank of England, to delay rate cuts, though we believe this would require a more sustained period of elevated oil prices. We still expect both the Fed and BoE to cut twice later in the year, with the ECB and SNB keeping rates on hold. With returns on cash deposits low or falling, we advise investors to seek diversified income. We like high grade and investment grade bonds, see attractive return potential in emerging market bonds, and also like diversified income strategies across equities, fixed income, and structured investments, particularly for investors in regions with low interest rates.