Escalating Tensions and Oil Market Reactions
Recent military strikes have heightened anxiety among Gulf Arab nations, particularly oil-producing states, as fears of escalating conflict grow. In response, Tehran has launched missiles targeting Israel, further intensifying the situation.
Oil remains a critical indicator of Middle Eastern tensions. Iran, a significant oil producer, is situated across the Strait of Hormuz from the oil-rich Arabian Peninsula, through which approximately 20% of the world's oil supply is transported. Any conflict could restrict oil flow to global markets, driving prices higher.
On Friday, Brent crude was trading around $73 per barrel, reflecting a 20% increase since the beginning of the year. Several major oil companies and trading houses have reportedly suspended shipments of crude oil and fuel through the Strait of Hormuz due to the ongoing attacks.
William Jackson, Chief Emerging Markets Economist at Capital Economics, noted that even if the conflict remains contained, Brent prices could rise to approximately $80, matching peaks observed during last June's 12-day war in Iran. A prolonged conflict affecting supply could push prices to around $100 per barrel, potentially adding 0.6 to 0.7 percentage points to global inflation.
Market Volatility and Currency Fluctuations
The ongoing conflict is expected to exacerbate volatility in global markets, which have already experienced significant fluctuations this year due to tariffs imposed by the Trump administration and a sharp decline in the technology sector.
The VIX volatility index has surged by one-third this year, while implied volatility for U.S. bonds has increased by 15%. Analysts predict that currency markets will also feel the impact, with the dollar index dropping approximately 1% during last June's conflict.
However, this decline was short-lived, recovering within three to four days. Analysts from CBA indicated that the extent of any potential drop in the dollar will depend on the conflict's magnitude and duration.
Should the conflict persist and disrupt oil supplies, the U.S. dollar is expected to strengthen against most currencies, except for the Japanese yen and Swiss franc, as the U.S. is a net energy exporter benefiting from rising oil and gas prices.
Israeli Shekel and Safe-Haven Assets
The Israeli shekel is likely to experience volatility, particularly following Iran's swift retaliation against Israel. Historically, the shekel dropped 5% at the onset of last June's conflict and reacted similarly to prior Israeli strikes on Iranian interests.
However, JPMorgan cautioned that this time could be different if the conflict and associated market risk premiums prove to be more enduring.
Demand for Safe-Haven Assets
The Swiss franc, regarded as a safe-haven currency during times of turmoil, is expected to face upward pressure, posing challenges for the Swiss National Bank. The franc has appreciated by 3% against the U.S. dollar this year.
Investors are also likely to flock to gold, which has surged by a record 22% so far in 2026, along with silver, which is also experiencing upward momentum. Additionally, demand for U.S. Treasury bonds is anticipated to rise, as their yields have declined in recent weeks.
In contrast, Bitcoin, which has lost its status as a safe-haven asset, fell by 2% on Saturday and has lost over a quarter of its value in the past two months.
Middle Eastern Market Outlook
Middle Eastern stock exchanges, particularly in Saudi Arabia and Qatar, will provide initial insights into investor sentiment on Sunday. Given their strong correlation with oil prices, an escalation of the conflict could adversely affect these economies.
Ryan Lemand, CEO and co-founder of Neovision Wealth Management, suggested that markets are likely to decline if hostilities persist throughout the day, with Gulf stocks potentially dropping between 3% and 5%.
The benchmark Saudi stock index has already fallen by 1.3% over the past five days, marking its second consecutive week of decline. Meanwhile, Dubai's main market, set to reopen on Monday, has also seen a downturn over the last two weeks.
Airlines and Defense Sector Implications
Global airlines have canceled flights across the Middle East, and their stocks may come under pressure if the conflict escalates and leads to further airspace closures. Conversely, European arms manufacturers, which have seen a 10% increase in stock prices this year, could benefit from heightened demand.
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