Middle East conflict: What investors need to know

The US attack on Iran’s nuclear facilities marked a major escalation in Middle East security concerns. Financial markets have opened relatively quietly following some modest ‘safe haven’ moves last week. Attention is focussed on the oil price with Brent crude for August delivery trading at $78.25 per barrel.

Since the beginning of June, the price of Brent crude oil has risen by 25%. In the days and weeks ahead, the main risk is of any significant disruption to oil production and distribution in the region, with Iranian threats to close the Straits of Hormuz - a major international choke point - being of greatest concern.

A sustained increase in global oil prices would hit the growth and inflation outlook, which have already been impacted by the trade war. New York wholesale gasoline prices have increased by 14% this month and will likely contribute to higher US inflation.

Higher oil and related energy costs would be damaging to the European outlook adding to inflation and detracting from growth – bearing in mind the impact on natural gas following Russia’s invasion of Ukraine in February 2022 and the subsequent implications for European growth. Break-even inflation linked bond spreads are starting to move higher.

Potential policy and market impact

The extent of any oil price shock will be determined by military and political developments and markets are awaiting some kind of retaliatory action by Iran. Higher inflation will complicate the outlook for the Federal Reserve and therefore for the US bond market. While safe haven flows might suggest lower US Treasury yields, inflation and monetary policy concerns might be a counterweight.

However, a further escalation of risk would likely be to the benefit of safe haven assets like the US dollar, the short end of the US Treasury market, the Swiss franc, the Japanese yen, and gold. Investors are likely to consider reducing exposure to asset classes that would underperform - equities, higher risk credit and emerging markets - if the geopolitical situation delivers a significant macroeconomic shock.

Increase geopolitical tensions and the escalation of military action in the Middle East add to supply side and trade frictions, which are likely to show in measures of business confidence. This may undermine the outlook for corporate earnings and pose a significant headwind to global equity markets. US equity futures were modestly lower on Monday morning (23 June) with the S&P 500 having traded sideways around the 6,000 level so far this month.

It would be more typical a response to see equity markets marked down in response to the escalation of military activity. US news reports suggest a lack of political and voter consensus in support of the US getting involved and this may also be reflected in consumer confidence surveys, adding to a more uncertain near-term outlook for investors. 

Credit resilience

Credit markets are likely to remain resilient but any deterioration in the growth and inflation outlook, together with concerns about global trade, will likely put pressure on credit spreads to move wider. Some credit indices are a touch higher already in European markets. We retain a positive view on credit market fundamentals and overall valuations and would expect any widening of spreads to be relatively short-lived, although this obviously depends on what happens in the coming days and weeks.

So far, markets have been relatively sanguine but the US’s decision to strike Iran takes global risks significantly higher, with retaliation by Iran on US military assets, or on the ability of shipping to move through the Gulf, being the key threats. It would be surprising if there was not a larger move in currencies and risk assets should these risks manifest themselves. Investors are likely to seek allocations to lower risk fixed income assets and inflation protection if broader market volatility picks up.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, AXA IM, as of 23 June 2025, unless otherwise stated). Past performance should not be seen as a guide to future returns.