Commentary on the Israel Iran conflict and its impact on markets

The intensifying sectarian conflict between Israel and Iran, driven by Israel’s airstrikes on Iranian nuclear and military facilities and Iran’s subsequent missile responses in June 2025, has rattled global markets.

Oil prices spiked over 10%, with international Brent crude oil prices briefly reaching $78 per barrel due to concerns over potential disruptions in the Strait of Hormuz, which is a vital oil corridor for global oil supply. Though prices later stabilised, ongoing tensions could fuel inflation, constraining central banks’ flexibility to lower interest rates in 2025, particularly against the backdrop of a protectionist environment marked by higher trade and tariff barriers.

Equity markets saw initial declines (more sheltered for those that have a larger oil concentration), but later recovered as hopes for de-escalation grew, particularly with the United States reaffirming their defensive rather than offensive position. Safe-haven assets, including gold, US treasuries and the US dollar, gained traction amid rising uncertainty.

Historically, geopolitical shocks tend to have fleeting market impacts unless they significantly impair economic growth or trigger stagflation (a negative growth gap and a positive inflation gap).

Currently, Iran’s oil exports remain mostly unaffected, with their domestic markets being largely targeted so far. Moreover, OPEC’s spare capacity has the ability to mitigate global oil supply concerns, given that spare capacity could match any shortfall from Iran. However, prolonged conflict or a blockade of the Strait could drive oil prices significantly higher, threatening global economic stability. That said blocking the Strait would prevent their own shipments from getting out and could trigger retaliation from other exporters.

Signs of diplomatic efforts, particularly from the US administration will be critical to watch given that a de-escalation in the conflict and a lower risk of spilling over into a broader-based regional conflict, is necessary for market normalisation.