March 10, 2026

 

The market response to the continued conflict in the Middle East suggests that investors expect a sharp but temporary shock, one that may fade over the coming weeks.

 

While the situation remains highly unpredictable, developments over the weekend suggested there is still a meaningful risk that the conflict will cause prolonged energy disruptions.

 

 

Why Markets May Be Underestimating the Duration of the Shock

 

Looking to the very near‑term horizon, the financial market reaction turning more negative hinges on indications of sustained energy and global shipping market disruptions. Energy infrastructure remains a primary area to monitor for economic and financial market impacts, spanning both higher oil prices and the risk of broader economic disruption from energy shortages.

 

Over the weekend, several data points reinforced the risk that disruption persists rather than fades quickly:

 

• Conflict escalation: The initial U.S.-Israel air strikes on Iran broadened into a more regional conflict, with thousands of air strikes and Iranian missile and drone retaliation across the Middle East, including civilian infrastructure targets.

 

• Energy system stress: Iran oil storage facilities have been damaged, and the Strait of Hormuz has been effectively closed to shipping — significant given that roughly 20–25% of global crude oil and liquefied natural gas (LNG) shipments pass through this route.

 

• Production and logistics constraints: Energy‑related activity has been hampered across the region, including stoppages in Qatar LNG production and Saudi Arabia oil refining, while storage limitations have forced some countries to slow oil production.

 

• Political continuity in Iran: Iran’s succession plan named Mojtaba Khamenei as the next supreme leader, signaling a continued hardline policy stance rather than a pivot toward de‑escalation.

 

To date, much of the impact reflects halted production and constrained logistics — conditions that can reverse quickly. The risk associated with continued escalation is that strikes damage critical energy facilities, shifting disruption from temporary to more structural. As is usually the case, this risk cuts both ways. In other words, de-escalatory rhetoric or reduced conflict intensity would likely be well-received.

 

 

From Regional Conflict to Global Supply Chain Risk

 

The distinction between stoppages and facility damage matters. Production can restart quickly once security improves; facility damage takes longer to repair and can keep supply impaired well after active conflict subsides. Potential attacks on Iran’s Kharg Island oil export facilities, or more damaging strikes on major energy facilities in Saudi Arabia, the United Arab Emirates or Qatar, would sharply raise concerns about a sustained derailment in global energy markets. Even if Iran’s stockpiles of weapons are severely depleted, by blocking — or potentially sinking — non‑military ships in the Strait’s shallow channels, Iran could render passage through Hormuz far more treacherous without formally closing it.

 

Because energy markets are globally integrated, this is not just a regional issue. Even if hostilities ease, shipping disruptions, rerouting, insurance constraints and delayed repairs could keep energy supply tight and global logistics strained, and therefore exerting upward pressure on global inflation trends.

 

 

How Markets Have Reacted

 

The financial market reaction through the first full week of the conflict followed the contours of prior geopolitical events in some regards with oil prices higher and sharper spikes in other energy commodities most affected by potential shortages. Since the conflict began on February 28 through last Friday, crude oil prices are up almost 30% along with 40%-plus surges in Europe and Asia natural-gas-related benchmarks, especially as much of the energy products shipped through the Strait of Hormuz head to Asia. Global interest rates have moved higher with some curve flattening. Rates have risen 15-25 basis points (bps) in the U.S. versus 20-30 bps or higher across countries in Europe. The U.S. dollar has strengthened by about 1% while gold has been choppy but lower overall (roughly 2%). The equity market picture has been more nuanced with equities negative overall and a broad sense of rotation where prior market leaders have been hit hardest versus relative resilience for laggards. On the surface, the 2% decline for the S&P 500 Index appears low given the overall severity of this geopolitical event. Non-U.S. equities have been hit much harder with both non-U.S. developed and emerging markets down in the 6-8% range — reflecting a combination of higher direct near-term economic exposure and the fact that this event follows a strong run of recent performance (particularly so for emerging markets).

 

The volatile backdrop has also caused extreme moves in some recent market winners. A notable example was Korea’s equity market, which saw three consecutive near-double-digit daily moves last week (7% loss, 12% loss, 10% gain) — in a market that was up nearly 50% year-to-date heading into last week (still up more than 30% in 2026 through Friday).

 

Financial markets were set to worsen this week with oil prices heading above $100 per barrel, further equity losses and higher interest rates. However, this started to reverse after U.S. President Trump suggested the war could end soon — a reminder that geopolitical events can produce sharp, often unpredictable swings across asset prices.

 

 

What’s Next

 

The Iran war is likely to remain the main area of focus for global financial markets. Key downside risk signals we’re watching for include evidence of physical damage to energy facilities, further escalation that increases the probability of infrastructure strikes and continued impairment of shipping through the Strait of Hormuz.

 

Duration is key: Markets appear to be pricing a disruption measured in a couple of weeks, while the mix of escalation, logistics constraints and the potential for infrastructure damage keeps on the table the risk that the shock lasts longer — and lingers through global supply chains even if hostilities eventually de‑escalate.

 

From a portfolio perspective, we would encourage focus on diversification. Real assets such as natural resources and listed infrastructure can serve as helpful diversifiers during prolonged geopolitical risk events. The conflict has effectively turned geographic chokepoints into hard supply constraints, accelerating both the perception and reality of resource scarcity and keeping us constructive on real assets overall. While the initial shock has weighed on global bond returns amid stagflation fears, diversification remains valuable, as a further major escalation would likely trigger potential recession risks that could lead to a sharp rally — particularly in the front and intermediate portions of yield curves in global bond markets.