- The US-Israeli strikes on Iran will have implications for energy markets, shipping costs, inflation risks and financial conditions – but everything hinges on how long the conflict lasts. While a prolonged war could bring back a 2022-style inflation shock, we continue to expect a relatively short-lived escalation, with oil prices expected at 70 USD/bbl (more than +15% from previous estimate; peak expected at 85 USD/bbl) and contained implications for global GDP and inflation. This would not change the course of the ECB and Fed as in Europe and the US, a 10% higher oil price leads to around 0.1-0.2pp higher inflation in the short term. A conflict extending beyond a four- to six-week window would have greater macro and market implications: We view three months as the turning point towards a switching regime risks and a recessionary scenario. But the US administration has an incentive to end the conflict soon as higher oil prices worsening the affordability crisis could mean less support in the November midterm elections.
- Navigation through the Strait of Hormuz – critical for 30% of global hydrocarbon flows – and disruption of oil production in the Gulf remain the crucial transmission channels. The immediate market reaction has been driven by maritime disruption rather than field-level scarcity: Oil prices spiked to about 82 USD/bbl (up +13% after the market opened on 2 March) and shipping data currently show more than 200 oil and LNG vessels anchoring outside the Strait of Hormuz, reflecting war-risk insurance issues and precautionary operational pausing. A prolonged conflict with significant disruptions in the Strait of Hormuz could see oil reaching 100 USD/bbl, but it should still end 2026 around USD 70/bbl as the market would eventually adapt. In a tail-risk scenario in which the Iranian regime targets energy infrastructure in the region and disrupts shipping in the strait, Brent could rise above 130 USD/bb before consolidating towards 80 USD/bbl by end-2026.
- For markets, policy constraints are shaping the backdrop as rising inflation fears delay rate cuts, keeping volatility elevated despite only moderate repricing so far. Oil-driven inflation is likely to sustain pressure on rates and weigh on easing expectations. Elevated valuations leave equities and credit vulnerable if energy costs remain high and growth slows, while defense, consumer non-cyclicals and energy are better positioned (especially upstream energy, non-Gulf LNG and some refiners); macro-exposed and energy-intensive sectors remain challenged (e.g. airlines, petrochemicals etc.), and technology faces a mixed environment. Recently higher CDS hedging may help limit spread widening, while private markets may see slower PE distributions and modest private debt spread increases. Markets face branching outcomes, requiring base-case positioning with protection against regime shifts. In the baseline scenario, the front end remains sticky, the belly benefits from growth repricing and the long end drifts toward 4.3% on US 10-year bonds and 2.7% on Bunds; in the tail-risk scenario, inflation pushes these to 5.0% and 3.2% as term premia rebuild and nominal bonds lose hedging properties. Equities may see a moderate correction before recovering to high single-digit returns in the baseline, but fall around -20% in the tail as sustained energy inflation pressures discount rates and earnings. Credit stays near 85bps for IG in the baseline, widening to 125bps under stress, while private markets diverge: infrastructure returns 10% in the baseline and 6% in stress, PE ranges from +12% to -12%, and private debt spreads widen from 500 to 650 bps as coverage ratios weaken.