WEM Market Pulse: Iran-Israel Conflict
As of June 18, 2025
Conflict Erupts — Markets on Alert
A sudden Iran–Israel conflict has jolted global investors. Hostilities erupted last week when Israel launched surprise strikes on Iranian nuclear and military sites, prompting heavy diplomatic activity. Diplomatic activity kicked into gear at the highest levels — US President Trump even left the G7 summit early to address the issue, downplaying any imminent ceasefire despite French suggestions. While global markets initially recoiled at the outbreak, they have since regained some poise. The key concern: any widening of the conflict could disrupt the Middle East’s energy flows and dent investor confidence in an already fragile economic environment.
Shockwaves in Oil and Equities
Geopolitical risk premium returned with a vengeance in oil markets. On the day fighting began, Brent crude spiked over 13% intraday, a swing reminiscent of the 2022 Ukraine invasion shock. Brent settled ~7% higher on June 13 at $74.23, its largest one-day jump in years. By early Tuesday (June 17), oil had stabilized in the mid-$70s per barrel — Brent at $73.54, up ~6% since the conflict’s start. Traders are balancing immediate supply assurances against potential escalation risks.
Thus far, Israeli strikes have avoided Iran’s oil infrastructure (e.g., the key Kharg Island export terminal), and Iran’s oil facilities reportedly remain intact and operational. However, analysts warn that further escalation could follow an energy-for-energy logic, where each side targets the other’s oil facilities — a scenario that would have far graver implications for output. Notably, about 20% of the world’s oil (18 – 19 million barrels per day) flows through the Strait of Hormuz, a chokepoint bordering Iran. Any threat to Hormuz, or a direct hit to major fields, could send oil prices soaring again and rekindle 1970s-style energy shocks.
Zdroj: Bloomberg Professional Terminal; Data as of 18.06.2025
Equity markets and currencies, meanwhile, have been whipsawed by shifting sentiment. On the conflict’s first day, stocks dived globally, and investors flocked to safe havens — gold, the US dollar, and Swiss franc all saw strong bids. European bourses and US equity futures sold off on war headlines as traders repositioned for higher oil-induced inflation and general risk aversion.
However, as it became clear the war was (for now) contained to Iran and Israel, markets rebounded. In Europe, indexes even managed to rise in subsequent sessions, though they remain on alert for any Middle East news that could change the calculus.
US and European markets are highly reactive to each new development — a tentative ceasefire rumor or diplomatic breakthrough could spark relief rallies, just as a wider conflagration could trigger another risk-off swoon. This conflict has effectively introduced a new variable for markets to price in, alongside inflation data and central bank signals. As one strategist noted, investors are now data-dependent and headline-dependent: economic reports and Middle East headlines are both driving day-to-day volatility.
Scenario Analysis: War Escalation vs. Peace Deal
Base Case: Contained Conflict, Volatile Status Quo
So far, markets seem to be assuming the Iran-Israel war, while fierce, stays contained and possibly short-lived. In this base case, oil prices may retain a moderate risk premium (a few dollars per barrel) but not explode higher, especially as no major supply has been knocked offline.
Equity markets in the US and Europe could remain choppy but avoid a deep correction — essentially treating the conflict as a regional issue unless it drags on or intensifies. Given that initial panic has faded, investors are tentatively returning to focus on fundamentals (earnings, interest rates), albeit with one eye on the news ticker. Defense stocks and energy companies might outperform on higher defense spending and oil prices, while industries sensitive to oil (airlines, transports) underperform slightly. The US dollar may stay firm as a safety bet, keeping pressure on emerging markets. Overall, in this scenario, the conflict adds to market volatility but not a lasting trend — essentially an unstable equilibrium contingent on no further surprises.
Downside Scenario: Escalation and Spillover
If the conflict worsens — e.g., Iran directly attacks oil infrastructure in the Gulf, the US becomes militarily involved, or proxy clashes ignite elsewhere — markets could enter a risk-off tailspin. Oil could spike well above $100 if a significant portion of Iran’s 2 million barrels/day exports are disrupted or if Hormuz shipping is impeded. Such a shock would fan global inflation just when it was cooling, likely forcing central banks to reconsider rate cuts or even hike again — a negative for both bonds and stocks.
Equities in the US and Europe would likely sell off sharply, possibly entering correction territory, led by sectors like airlines, autos, and consumer discretionary (which suffer from higher fuel costs and uncertainty). Safe havens would soar: gold could test new highs, and the dollar and Swiss franc would rally further. Crucially, if war escalation coincides with an already slowing US economy, it could accelerate a slide into recession (via an energy price shock and sagging consumer/business confidence).
This is the nightmare scenario for investors: stagflation risks re-emerge, and recession odds spike. Credit spreads would widen as default fears grow, and emerging markets (especially those dependent on oil imports or those in the Middle East) would be hit hardest. Volatility would reign until clear signs of de-escalation or external intervention to secure oil supplies. In sum, an escalation could deal a double blow to markets — undermining growth while raising inflation — forcing a painful recalibration of asset prices.
Upside Scenario: Ceasefire and Diplomatic Breakthrough
On the other hand, a faster-than-expected ceasefire or diplomatic resolution, however unlikely it may seem in the fog of war, would likely boost global markets. If Iran and Israel move to halt hostilities — perhaps brokered by major powers — and especially if talks hint at Iran re-engaging with the West (nuclear deal revisited, sanctions relief), the impact could be dramatic. Oil prices would likely fall back significantly (potentially retracing the recent ~$5 – $10 war premium). Reports that Iran is seeking an end to hostilities have already knocked oil down in bouts of intraday trading. A sustained peace would remove a key supply risk, which could even swing the oil market back into mild surplus if Iran ramps up exports.
Lower oil and calmer geopolitics would, in turn, boost stocks, particularly in Europe, where cheaper energy costs aid industry, and in emerging markets. Sectors such as airlines, tourism, and manufacturing would get a lift.
Moreover, any concrete signs of Iran opening up, which represents a massive opportunity for trade, could spur investment flows into Western companies poised to benefit, including energy equipment firms, construction, consumer goods, and others, as well as into Middle Eastern markets more broadly. (See Appendix: Iran’s Westward Shift — A New Supply Frontier for detailed analysis.) The risk-on mood could also weaken the dollar as safe-haven demand ebbs, aiding US multinationals and easing financial conditions. One wildcard is that if peace brings significantly more oil to market in 2025 – 26, the resulting disinflationary boost might give central banks cover to cut rates sooner than expected, further propelling equities and bonds. In short, a diplomatic resolution could flip the narrative to a peace dividend rally, though it likely requires verifiable progress on underlying issues such as nuclear accords and security guarantees to be sustained.
Economic Backdrop — Mixed Signals, High Sensitivity
All of this is unfolding against a nuanced macroeconomic backdrop. The US economy has been sending mixed signals of late — still growing, but clearly losing momentum. Our internal economic scorecard now points to a marked slowdown. Whereas most indicators were solidly expansionary just a few years ago, the current picture is more cautious. Only one indicator remains firmly positive — non-financial corporate cash flows — while the rest are evenly split between cautionary and recessionary readings.
Key warning signs such as an inverted yield curve, weakening manufacturing orders, and a sharply declining leading economic index are flashing red. At the same time, the labor market and corporate credit metrics remain moderately resilient. This mixed profile underscores the importance of a vigilant, data-sensitive approach to portfolio management. Nothing can be taken for granted in today’s environment.
This nuanced slowdown means markets were already on edge before the Middle East turmoil, reacting sharply to each economic data release (inflation prints, jobs numbers, Fed commentary). Now, with the conflict adding a new layer of uncertainty, that sensitivity is only heightened. Investors know that a major oil price rise could exacerbate inflation just as growth is slowing — effectively squeezing the window for soft landing outcomes. On the other hand, a quick peace could alleviate an inflation headwind. In essence, markets are highly data-dependent and news-dependent right now.
We see somewhat mixed US recession indicators — not an all-out downturn, but far from robust — and that makes traders especially reactive to any development that tilts the outlook. This week’s events in the Middle East are a prime example: with the US economy in a late-cycle perch, a foreign shock can swiftly alter rate expectations and risk appetite. Indeed, US Treasury yields initially fell on a safety bid when missiles flew, then bounced as inflation worries resurfaced — a sign of oscillating expectations.
The European economy similarly faces a balancing act: it’s benefiting from easing inflation and resilient services activity, but as a major energy importer, Europe is vulnerable to oil/gas spikes. European Central Bank officials have stressed they remain data-driven; now they must also be headline-driven to an extent, as war news can sway the inflation outlook between meetings. In short, the market mantra has become to watch the data, and watch the Middle East.
Conclusion — Vigilance in Uncertain Times
For institutional investors, the implications are twofold. First, risk management is paramount: geopolitical tail risks like the Iran-Israel conflict can materialize suddenly, so maintaining diversified portfolios and hedges (oil options, gold, volatility instruments) is prudent. The conflict’s trajectory is highly fluid — it could de-escalate or spiral — and markets will respond in real time. Second, opportunity often lies in crisis. The prospect of Iran’s re-entry into the global economy, however tentative, should be kept on the radar. Should diplomatic winds shift, sectors from European petrochemicals to Asian LNG shipping to frontier market bonds could re-rate positively.
In the near term, expect markets to trade on each twist of Middle East news, while also parsing every economic data point. This hyper-reactive climate means higher volatility but also potential mispricings for the discerning investor. US economic fundamentals are lukewarm — not signaling imminent recession, but far from robust — which means the market’s baseline is fragile. Any additional shock (like an oil supply disruption) could hit harder, but conversely, any relief (a peace deal or cooling inflation) could spark outsized relief rallies.
Ultimately, the market pulse right now beats to both macro and geopolitical rhythms. The Iran-Israel conflict has injected uncertainty and energy risk into the global outlook, affecting US and European markets through oil prices and risk sentiment. Yet it also opens the door, however narrowly, to a transformational longer-term scenario if Iran’s stance vis-à-vis the West changes. Investors should stay alert and nimble, as the situation remains fluid. In an environment where green lights are few and caution lights many, prudence is key — but so is positioning for when red lights eventually turn back to green. Markets will remain on edge, highly sensitive to both data releases and Middle East developments, in the weeks ahead. Keeping a close pulse on these drivers will be critical for navigating the volatility and uncovering value in these uncertain times.
Appendix: Iran’s Westward Shift: A New Supply Frontier?
Interestingly, the crisis carries the seeds of an opportunity. There is growing chatter about Iran potentially pivoting toward the West — whether via a negotiated settlement or a post-conflict diplomatic realignment. If Tehran seeks a deal (for example, on its nuclear program) and de-escalation with Western powers, the economic payoff could be enormous. Iran sits on massive untapped export capacity in oil, gas, petrochemicals, metals, agriculture, and tourism that sanctions have long restrained. A Western rapprochement could unlock these sectors, reshaping global commodity markets and regional economies.
To appreciate the scope: Iran holds one of the world’s largest hydrocarbon reserves. It ranks #3 globally in proven oil reserves (roughly 209 billion barrels, about 12% of the world’s total), behind only Venezuela and Saudi Arabia. Its oilfields are prolific but under-invested — current output is ~3.3 million barrels per day, constrained by sanctions, versus an OPEC-assessed capacity around 3.8 million if restrictions were lifted. (For historical context, Iran once pumped 6 million bpd at its 1974 peak before the revolution — over 10% of world supply then — highlighting the potential if international investment and technology return.)
Iran is also the #2 holder of natural gas reserves globally, with an estimated 1,200 trillion cubic feet of gas (≈34 trillion cubic meters, ~17% of world proven reserves). Its giant South Pars field (shared with Qatar) underpins Iran’s status as a top-3 gas producer, though most output is consumed domestically under sanctions. Full reintegration could make Iran a major LNG exporter or pipeline supplier to energy-hungry markets (even Europe, which is seeking new gas sources).
Beyond oil and gas, Iran’s resource base is formidable. It has a large petrochemicals industry (the second-largest output in OPEC after Saudi Arabia) and numerous plants that, if given access to Western technology and markets, could sharply increase exports of plastics, fertilizers, and industrial chemicals. In metals and mining, Iran boasts significant global rankings in reserves: for example, it holds the 7th largest copper reserves (~36.5 million tons, ~4% of world supply) and sizable deposits of iron ore (ranked top 10 globally), zinc (6th largest), and others. The country is already a top steel producer in the Middle East — sanctions relief could spur an export boom in steel, copper, and other mined products.
Agriculture is another underappreciated strength: Iran’s varied climate and 15 million hectares of arable land make it a leading producer of goods like pistachios (historically the top global exporter), saffron (over 90% of world supply), and fruits. With modern irrigation, investment, and open trade channels, Iran could substantially expand its agricultural exports, benefiting global food markets.
And not least, tourism stands to flourish. Iran’s rich cultural heritage — Persian history, archaeological sites, diverse landscapes — attracted ~7 – 8 million foreign tourists annually in recent pre-pandemic years. In fact, Iran hosted 7.4 million international tourists in the last Iranian year (March 2024 – March 2025), despite geopolitical tensions. A normalization could see tourist arrivals surge, unlocking billions in revenue via travel, hospitality, and infrastructure investments.
In short, a diplomatic resolution that brings Iran in from the cold could unleash a wave of supply across multiple markets. Oil is the headline item — additional Iranian barrels would be a bearish force on prices (welcome news for importers and inflation fighters). European energy security would improve with another major gas supplier in the mix. Metals and other commodities could see new supply streams, potentially capping global prices. Investors would also eye a sizable new emerging market of 85 million people, rich in resources — a potential boon for foreign direct investment in everything from petrochemicals to consumer goods and tourism.
This „peace dividend“ scenario is not yet priced in, but its mere possibility provides a counter-narrative to the risks of war. It suggests that if the conflict drives a political realignment, the medium-term outcome could be lower energy costs and new growth opportunities globally, rather than stagflation. However, if the conflict escalates, there is a possibility of a prolonged trade dispute, which could have widespread economic consequence.
Amirali Khaleghi, CFA (Portfolio Manager & Investment Strategist)
Alexander Chizganov (Portfolio Manager)
