By Renzi Thirumalai
Geopolitical escalation: Composure amid the chaos
This past weekend the United States (US) and Israel initiated joint military action against Iran, described by US and Israeli officials as "preventative action" to curb the Iranian nuclear programme. US President, Donald Trump, posted a video on social media on Saturday morning citing the aim of defending the American people by eliminating threats from the Iranian regime. The action itself had been well telegraphed, with growing civil unrest within Iran, increased engagement between the involved parties, but more so by a significant build-up of US military presence in the region in recent weeks.
The escalation comes on the back of a more isolated - but surprising - missile strike by the US on Iranian nuclear facilities last June. The supporting narrative from the US then and again this weekend has consistently been that Iran had been close to developing a nuclear weapon, despite US political leadership claiming this capability had been "obliterated" in the strikes last year. This note focuses on the financial market implications, but it is worth sparing a thought for the invariable tragic humanitarian costs of such conflicts.
Market response
Initially US markets demonstrated resilience relative to their Asian counterparts, who have significant dependency on oil imports from the Middle East. As the week has progressed, market turmoil has broadened, with weakness in equity and bond markets across the board. Emerging markets - which had outstripped their developed peers by some margin in 2025 and over the first two months of 2026 - have seen a greater selloff as investors' risk-off sentiment has driven dollar demand, with the greenback breaking a recent trend of weakness and rallying as much as 2% over the first two trading days of the month.
Gold has, perhaps temporarily, lost its lustre and been weaker this week as global yields rose on fears of rising inflation, fuelled by the oil price gaining over 10% since last Friday. In general, market positioning has unwound as investors de-risked and took profits on assets that had seen strong recent gains. Regions and sectors more directly exposed to the conflict have faced a more punitive response, alongside a modest rise in rates as markets price in a potentially more inflationary backdrop, with rate cuts being largely priced out of the local market and reduced in the US.
The market is now keenly focused on the Strait of Hormuz, where prior to the conflict 17% of global oil production travelled daily - largely destined for Asia. The estimation is that oil tanker activity is currently at 15% of normal levels, however if the Straits' closure is gradually unwound over the next week, the oil price could still stabilise given current inventory levels. However, an extended closure of the Strait, puts significant upside risk to current levels, with $100 or more not an inconceivable outcome.
Looking forward
At the risk of stating the obvious, there is a high degree of uncertainty going forward. The extent of the Iranian response, especially in respect of its immediate neighbours, was likely not in the initial calculus. There are a few plausible scenarios, the most likely of which is that the current conflict is significantly de-escalated in the coming weeks once the US can declare victory having sufficiently disabled the Iranian military apparatus and/or negotiated some form of ceasefire. This would suit the US president who has mid-term elections on the horizon, and a support base with whom a protracted global conflict would not be popular. In this case, markets will quickly settle down and absorb the temporary oil and associated supply-chain disruptions. In this scenario there is more opportunity than crisis.
There is also a scenario where the Iranian resistance is more resilient than anticipated and the conflict deteriorates and stretches out further than what is ideal for both the US and Israel. In this circumstance the impact on markets will be more severe, with materially elevated oil prices hampering global productivity, sparking higher inflation and higher rates coupled with weaker equity markets. Given the elevated valuations in many regions, an extended conflict could see a significant de-rating of equity markets and a higher degree of risk aversion could ultimately see dollar strength maintained and perhaps gold finding some support as portfolios are de-risked and appropriately rebalanced.
This is a pivotal geopolitical moment that calls for steady focus and careful risk management. It is important to keep in mind that markets have survived many episodes like this through many cycles over the years - oil shocks, global conflicts, a global pandemic, sovereign credit downgrades etc. While each event is unique, there is a commonality that allows investors to build on prior experience to better navigate the current turmoil - said differently, history doesn't repeat but it does rhyme.
As noted above there is often opportunity that lies within crisis, and with that in mind it is vital to maintain composure amid the chaos.
