The Iran-Israel conflict – what are the implication for global markets?

The long-simmering tensions between Iran and Israel have escalated significantly in the last week, with potential implication for global markets which investors will need to keep a keen eye on. While geopolitical risks are nothing new, the current developments are particularly potent due to their implications for oil supply, potentially leading to a fresh energy shock and renewed inflationary headwinds. Both the UK and US central banks are meeting this week to decide what’s next for interest rate policy – it’s widely expected that both the Federal Reserve and the Bank of England will put the brakes on any further rate cuts.

What’s the latest on the Iran-Israel conflict?

The roots of the conflict trace back to Iran’s support for proxy groups such as Hamas, Hezbollah, and others operating in the region. These groups have long been a source of instability and Israel has now shifted its strategy to directly target the source. With nuclear negotiations between the US and Iran stalling, Israel’s military carried out strikes near the capital of Iran – Tehran – and detected missile launches from Iran.

This week, President Trump has called for Tehran’s “unconditional surrender” in a series of social media posts, stating his “patience is wearing thin” fuelling further speculation that the US could join Israel’s offensive and raising fears of a broader escalation. It is unclear if Trump intends to enter the US into the conflict, or whether he is using the threat of military action as a bargaining chip for nuclear negotiations.

How did markets react?

The markets responded swiftly to the news, with volatility in equity markets and oil markets. WTI crude oil has surged by 20% in this month alone, driven by fears of tighter sanctions on Iranian exports. Currently, around 2 million barrels of Iranian oil are making their way to China, but these shipments may be halted. The bigger concern here is the potential for Israeli retaliation that could disrupt up to 20% of global oil deliveries - a scenario not yet fully priced into markets, in my view.

Equities only temporarily sold off, reflecting a degree of resilience or perhaps complacency. Still, elevated valuations leave little room for error, and further escalation could trigger renewed volatility.

Fixed income markets are caught in a bind. On one hand, geopolitical risks and slowing growth support bond prices. On the other, rising oil prices are inflationary, giving central banks another reason to delay rate cuts. As a result, bonds are likely to remain range-bound, with neither growth nor inflation providing a clear direction.

For commodities, gold continues to shine as a ‘safe haven asset’, benefiting from both geopolitical uncertainty and inflation concerns. Oil, as mentioned, is at the centre of the storm and could see further volatility in the coming weeks.

Looking at currencies, the US dollar has not performed its usual role as a “safe haven” asset. There are lots of questions mounting over US fiscal policy, geopolitical leadership, as well as section 899, part of the “One Big Beautiful Bill Acy” (OBBBA), facing scrutiny from foreign investors. This has led to lower currency flows, with the US dollar down around 10% against a basket of its major trading partners and down around 8.5% against sterling.

Read more: what is section 899 and what could it mean for investors?

Looking ahead

The Iran-Israel conflict adds another layer of uncertainty to an already complex global landscape. For investors, this is a timely reminder to reassess their total portfolio diversification across shares, fixed income and alternatives, such as infrastructure and commodities. With valuations stretched and geopolitical risks rising, a more defensive posture may be warranted. It’s a moving picture so we will continue to assess the situation and provide updates as and when we think it’s required.