As the conflict between Israel and Iran escalates, investors are analyzing several potential market scenarios, especially if the United States deepens its involvement. A key concern is a sharp increase in energy prices, which could amplify economic consequences across global markets.
Rising oil prices could fuel inflation, weaken consumer confidence, and diminish the likelihood of interest rate cuts in the near term. This may prompt initial stock market sell-offs and a flight to the US dollar as a safe-haven asset.
While US crude oil prices have surged by around 10% over the past week, the S&P 500 index has remained relatively stable, following a brief decline after the initial Israeli strikes.
Analysts suggest that if Iranian oil supplies are disrupted, market reactions could intensify significantly. A serious supply disruption would likely ripple through global petroleum markets and push oil prices higher, leading to broader economic consequences.
Oxford Economics has outlined three possible scenarios: a de-escalation of conflict, a full suspension of Iranian oil production, and the closure of the Strait of Hormuz. Each scenario carries escalating risks to global oil prices. In the most severe case, prices could soar to $130 per barrel, pushing US inflation to nearly 6% by year-end. In such a scenario, consumer spending would likely contract due to declining real income, and any possibility of interest rate cuts this year would likely vanish under rising inflationary pressure.
So far, the most direct impact has been felt in oil markets, where Brent crude futures have jumped as much as 18% since June 10, reaching nearly $79 a barrel, the highest level in five months. Volatility expectations in the oil market now exceed those of major asset classes like equities and bonds.
Although equities have largely brushed off the geopolitical turmoil, analysts believe this could change if energy prices continue to climb. Rising oil prices could weigh on corporate earnings and consumer demand, indirectly pressuring stock markets.
While US stocks have held steady for now, further American involvement in the conflict could spark market anxiety. Historical patterns suggest any sell-off might be short-lived. For instance, during the 2003 Iraq invasion, stocks initially dropped but recovered in subsequent months.
As for the US dollar, its performance amid escalating tensions could vary. It may strengthen initially due to safe-haven demand, although past conflicts have sometimes led to long-term weakness, especially during prolonged military engagements.
