Investors brace for a bigger hit from Middle East war
Conflict in the Middle East has moved from just an extreme risk to a top concern for investors uneasy about a power struggle in Iran and the prospect of a protracted regional war that would affect everything from global trade to inflation.
US-Israeli strikes killed Iran’s Supreme Leader Ayatollah Ali Khamenei on Saturday; Iran’s retaliation against Gulf cities has created chaos, with airlines grounding flights and tankers carrying oil and other products suspending passage through the key Strait of Hormuz.
The first risk for financial markets is uncertainty about what will happen next in Iran, given the complexity of the Islamic Republic’s system of governance, the ideological nature of its support base, and the power of the Revolutionary Guard.
That complicates the outlook, which has been rising for weeks but is now hostage to the actions of oil-producing countries and how the transit of tankers through the Middle East is affected.
Worldwide inflation and even the safety of bonds, a traditional investment haven in times of stress, have major implications.
“Tail risks in the Middle East have increased,” said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.
“Unless Iran says it wants to negotiate, markets will reprice from geopolitical shock to regime risk shock to protracted conflict and not just retaliation.”
Analysts say a bigger risk is complacency in markets that assume the effects will be limited and downplay any comparisons with Iran’s regime change in 1979, similar to last June’s “12-Day War” in Iran or Russia’s numerous attacks on Ukraine.
Brent crude rose nearly 8 percent on Monday, marking a gain of nearly 30 percent so far this year.
Investors are buying U.S. Treasury bonds and gold to hedge against a variety of risks, including tensions in the Middle East and the unstable policies of U.S. President Donald Trump.
Gold experienced a record rise last year and is up 24 percent so far in 2026. By comparison, the main U.S. stock index rose just 0.5 percent.
“History strongly argues that the geopolitical risk premium should be sold when hostilities begin,” Barclays analysts said in a client note.
“What concerns us is that investors have now learned this pattern and are underpricing a scenario in which containment will fail.”
William Jackson, chief emerging markets economist at Capital Economics, predicts that a prolonged conflict affecting supply could cause oil prices to jump to around US$100 ($A141), potentially adding 0.6-0.7 percentage points to global inflation.
Tarik Dennison, a wealth advisor at Zurich-based GFM Asset Management, said markets were already underestimating inflation threats.
“Given the proximity of Hormuz oil and gas after Russia, there will be more impact on Europe than on the United States,” he said.
“There may be a slight rise in gold in the short term, but gold is already priced in an environment of maximum geopolitical uncertainty.”
On the other hand, some analysts predict that Iran will not be able to disrupt trade in the Gulf region and its impact on oil prices will be limited.
“We wouldn’t be surprised if any selling in the (U.S.) S&P500 on Monday morning (U.S. time) turns into a rally due to expectations of lower oil prices once the latest Middle East war ends,” said Ed Yardeni, president of New York-based Yardeni Research.
The Australian Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
