Iran conflict, latest developments
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
What happened?
Global equities declined again over the past 24 hours amid mounting concerns the US-Iran conflict could persist longer than previously anticipated, though sentiment partially recovered late in the US trading session on Tuesday following news the US plans to provide insurance and security for ships passing through the Strait of Hormuz.
The US embassy in Riyadh was hit by drones, a drone struck a parking lot near the US consulate in Dubai, and the State Department ordered evacuations from Bahrain, Iraq, and Jordan. Missile and drone attacks also targeted Tel Aviv, while questions grew over how long Gulf states’ stockpiles of defensive weapons would last against sustained barrages.
Regarding energy, oil storage facilities at the United Arab Emirates’ port of Fujairah—a major bunkering hub—were hit by drones, slowing down ship refueling. Owing to limited storage capacity, Iraq has started to reduce production in two of the country’s large oil fields.
The S&P 500 closed down 0.9% on Tuesday after trading as much as 2.5% lower at one point in the session. Energy stocks outperformed amid the sharp rise in oil and gas prices. In Europe, major indices fell by 3-4%, and earlier in the day, Asian markets also declined . Pressure resumed in early Wednesday trade, with Japan’s Nikkei 225 falling 3.6% and South Korea’s benchmark KOSPI down 12% (see more on Asia equity views below).
The escalation in hostilities has raised concerns about the security of energy supply through the Strait of Hormuz, with Iranian officials threatening to target ships attempting to transit the route. Over the past 24 hours, two tankers passed through the Strait, down from 30-35 in previous weeks. In response, President Trump has announced the US will provide insurance and, if necessary, escorts, for ships passing through the Strait.
Brent crude oil climbed to USD 84/bbl, up close to 15% from the USD 72.5/bbl on Friday 27 February, the day before the launch of the airstrikes. European natural gas futures have now risen around 70% since the start of the week, after Iranian strikes halted Qatar’s LNG production. Also, heating oil in the US and gasoil in Europe (diesel) saw large price increases, both up by around 10%.
The renewed jump in energy prices pushed government bond yields higher around the world, as investors reassessed the outlook for inflation, the trajectory of central bank policy, and potential fiscal costs relating to higher energy costs, though bond markets also partially recover ed later in the trading session. Gold fell 3.8%, weighed down by concerns about central bank policy, a stronger dollar, and liquidity-raising by investors, though it was up around 1.5% in early Wednesday trade. The US dollar index, DXY, has rallied 1.6% so far this week, and the CBOE Volatility Index (VIX) has climbed to its highest level since November.
We continue to monitor the situation closely, though our base case remains that the disruption to the global supply of energy will prove brief. From a market perspective, this should mean that stocks ultimately recover from the current volatility. This would be in line with the impact of most geopolitical shocks in recent history.
How do the current situation’s supply disruptions compare to the 2022 European gas price spike?
The disruption to Qatar’s LNG production has pushed European gas prices up by around 70% since 27 February, immediately prior to the first US-Israeli strikes on Iran, to about EUR 54 per MWh.
Parallels can be drawn with the 2022 European gas price spike, following Russia’s invasion of Ukraine. Qatar is the second-largest producer of LNG globally, accounting for about 20% of total trade. As an important marginal source of energy supply, shocks to LNG supply can also have a larger impact on pricing than its 7-8% share of total gas supplies might suggest.
However, there are also important differences. Thus far, the price surge is modest compared with 2022, when European gas prices increased tenfold in a two-week period and at their peak reached EUR 343/MWh.
In part, this reflects Europe's lower dependence on Qatar gas. In 2021, prior to the Ukraine war, Russia supplied about 40% of the EU’s total natural gas imports, with pipeline gas from Russia accounting for roughly 35-40% of EU gas consumption. Europe imports only about 10% of its LNG from Qatar, although some individual countries' dependence is higher (for example, Italy circa 33%).
Nevertheless, some countries are more dependent on LNG from Qatar, particularly in Asia. India and Bangladesh rely on Qatar for more than half of their LNG imports based on shipping tracking data. This dependence could increase global competition for available supplies, potentially pulling US cargoes destined for Europe into Asian markets, with a knock-on effect on prices. This was the experience in 2022 in the reverse direction: As Europe outbid Asia for available LNG cargoes, Asian buyers faced higher spot LNG prices and increased competition for supply.
The price spike in 2022 was also exacerbated by EU regulations, which introduced minimum gas storage level requirements, requiring member states to fill storage sites to at least 80% of capacity by 1 November 2022. Forced buying in an already supply-constrained market contributed to the rise in prices ahead of the deadline. These rules are still in place, now with a 90% minimum requirement by 1 November, but are a known feature of the market.
The inflationary impact is also likely to be different, in our view. Aside from a likely smaller price increase, the inflationary impact of higher gas prices in 2022 was also exaggerated by the energy shock coming on the back of the pandemic shock, compounding the impact on prices. The current disruptions come amid a period of disinflation.
How meaningful is the impact for US, European, and Asian consumers, respectively, if energy price disruptions last for six months?
We have made estimates of the economic impact based on two scenarios for the next six months. In our first scenario, oil prices rise to USD 90/bbl before returning to a long-term average of USD 70/bbl, and gas prices rise 30% higher than the pre-conflict average, before returning to last year’s levels. In our second scenario, oil prices increase to USD 120/bbl and gas prices increase by 250% (Ukraine invasion levels) and remain there.
We estimate that US consumption growth would be reduced by around 40-50bps in scenario one and up to 100bps in scenario two. US consumption would rebound, albeit not fully in 2027. The impact in China, Japan, and the Eurozone is roughly half that of the US, but on our modeling does not recover as quickly in 2027.
The transmission channel comes primarily through higher prices for energy dragging on households’ ability to spend. In scenario one, US inflation would be 60bps higher in 2026, fully reversing in 2027. In scenario two, the impact could be around 150bps higher in 2026, almost fully reversing in 2027. The inflation impact is broadly similar in the rest of the world, with slightly more persistence into 2027.
The greater volatility in US consumption comes because we assume a greater sensitivity to energy prices in consumption in the US, where, because of lower taxation, price rises are likely to have a more meaningful impact on consumer prices.
We note that the cost of hiring a tanker to ship oil from the Middle East to Asia has nearly quadrupled since last week to an all-time high near USD 500,000 a day, according to Bloomberg. However, the contribution of increasing air/sea freight and insurance costs to the price of imported goods is generally insignificant. According to OECD data, international transport and insurance costs (ITIC) currently only represent 4-8% of the import price of a product. In turn, import prices are only a minority of the consumer price of a product, while imported products are only a small fraction of overall CPI. The overall impact on inflation of higher transit costs is therefore likely to be small.
What’s the outlook for regional assets?
The start of the conflict has increased the geopolitical risk premium for MENA equity markets, while sovereign and corporate bond spreads have also widened. Moves were more pronounced in the high yield and real estate segments.
In our base case of a limited conflict and short-lived energy and trade route disruptions, we would expect historical patterns of post-conflict stabilization in Middle East bonds to play out as geopolitical tensions ease and policy responses support fundamentals. Technicals remain constructive, with resilient local demand for quality sovereign and corporate bonds. Issuers benefiting from robust balance sheets and government support may fare best.
In an adverse scenario of a sustained conflict or further escalation, Middle Eastern high yield bonds would be most affected, facing deeper spread widening and liquidity stress. Vulnerable sovereign and corporate bonds with weaker fundamentals could see pronounced underperformance and capital outflows. To manage risks, we focus on higher-quality bonds with some level of sovereign involvement or a close connection to local socioeconomic stability, with policy intervention from governments with robust finances a potential mitigating backstop.
For more details on our regional fixed income views, please see "Emerging market bonds: CEEMEA credit: Implications of US-Iran escalation" (published 3 March 2026).
For global investors, we believe the direct impact of weakness in regional assets is likely to be relatively limited. MENA equities comprise approximately 5% of the overall MSCI Emerging Markets index, and global investor exposure to the region is relatively low. Furthermore, the positive correlation between these markets and both elevated oil prices and a stronger US dollar could partially offset the effect of a short-term deterioration in investor sentiment.