Conflict in the Middle East: Markets awaiting consequences

The events that were feared have become reality. Reports of coordinated military strikes by the United States and Israel against strategic facilities in Iran have stirred up the international community. In response, Iran attacked US military bases in the region. This conflict has unpredictable consequences for global stability and the economy.

Geopolitics as a key driver of markets

"Geopolitics continues to play a key role for currency markets," two currency strategists from OCBC Group Research wrote in their analytical report. Their words, spoken even before the escalation began, sound like a prophecy today. A conflict of this magnitude is not just a local war, but a tectonic shift that can change global economic alliances and trade flows.

Market reaction forecast:

Oil market: Brent and WTI crude oil prices may soar to multi-year highs. The Strait of Hormuz, through which about 20% of the world's oil passes, is under threat of blocking. "Any conflict will jeopardize oil supplies from the region, which accounts for about a third of global production," the strategists note. Supply disruptions threaten global energy shortages, which will inevitably lead to higher inflation and slower economic growth in importing countries such as China, Japan and the European Union.

Currency markets: Investors around the world will flock to "safe havens". The US dollar, Swiss franc and Japanese yen may strengthen. The dollar, despite the direct involvement of the United States in the conflict, traditionally benefits from global instability due to its status as the main reserve currency. The currencies of developing countries and countries dependent on energy imports, on the contrary, were under strong pressure.

Stock markets: Global stock indexes will show a sharp decline. Uncertainty and fear are forcing investors to get rid of risky assets such as stocks. Airline stocks, travel companies, and companies whose production chains depend on stable supplies may suffer the greatest losses. At the same time, shares of defense enterprises and oil and gas companies will show growth..

Economic consequences: from inflation to recession

Direct military action is just the tip of the iceberg. The long-term economic consequences can be much more devastating.:

Energy crisis: Prolonged conflict can lead to persistently high oil and gas prices. This will hit consumers' wallets, increase costs for businesses, and could trigger a global recession.

Disruption of logistics chains: The Middle East is not only oil, but also an important transport hub. The disruption of navigation through the Suez Canal and the Strait of Hormuz is paralyzing global trade, causing shortages of goods and rising prices for everything from electronics to food.

Global inflation: A sharp rise in prices for energy and transport services will be a powerful inflationary shock. Central banks around the world will have to make difficult decisions: raise interest rates to combat inflation, risking worsening the economic downturn, or accept the depreciation of money to support the economy. Most will probably choose the first option, which will make loans more expensive and slow down business activity even more.

Humanitarian crisis and migration flows: The war will inevitably lead to a humanitarian catastrophe in the region. Refugee flows to neighboring countries and to Europe will put additional strain on social systems and budgets, and may also provoke political tensions within the host countries.

The political landscape: new alliances and old splits

The conflict will immediately reformat international relations.

The position of China and Russia: Beijing and Moscow have condemned the aggression against Iran, their strategic partner. They can use the situation to strengthen their influence in the Global South, presenting themselves as an alternative to the Western world order. There may be attempts to block any resolutions in the UN Security Council and provide Iran with economic and, possibly, military-technical support.

A split in the West: The European allies of the United States will find themselves in a difficult position. On the one hand, there are obligations within the framework of NATO, on the other — economic dependence on Middle Eastern energy resources and unwillingness to get involved in another major conflict. Serious disagreements are likely to arise between Washington and key European capitals such as Paris and Berlin.

The Arab world's reaction: The Arab monarchies of the Persian Gulf, traditionally hostile to Iran, may tacitly support the actions of the United States and Israel. However, open support would be risky due to the possible negative reaction of its own population and the threat of retaliatory strikes from Iran and its proxy forces in the region (Hezbollah, Houthis). Stability in Saudi Arabia, the UAE and other countries will be in question.

What's next? Uncertainty as the new normal

The world froze in anticipation. The further development of events depends on many factors: how large-scale Iran's response will be, whether it will be possible to keep the conflict within the regional framework, and what role diplomacy will play.

However, one thing is already clear: the era of relative stability based on predictable rules has come to an end. The markets are entering a period of high volatility, where the price of oil will depend not on the balance of supply and demand, but on news from the front. Investors and politicians will have to adapt to the new reality.