Investment Viewpoint: Markets absorb geopolitical stress

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways

1. The conflict has broadened, but markets still expect it to be short lived and regionally contained. Despite escalating strikes and disruption around the Strait of Hormuz, overall market functioning remains orderly.
2. Energy is the main transmission channel to the global economy, but there are regional disparities, Europe and Asia Pacific more vulnerable. Oil and gas prices have moved above their 2025 ranges, but without the supply chain stresses seen in 2022, the inflation impact should be more limited.
3. Bond yields have risen as inflation risks are reassessed. Investors now expect fewer US rate cuts, contributing to a flattening of yield curves.
4. Equity performance shows a classic geopolitical pattern. Cyclicals weakened, New Economy sectors proved resilient, and Energy outperformed which helped the US market lead globally

How are developments in the Middle East affecting markets?

• With the confrontation now in its second week, geopolitical developments continue to influence commodity markets, interest rate expectations, equity sector performance, and regional market leadership.
• The past week has seen a broadening of the conflict’s geographic footprint, with Iran conducting strikes across multiple countries and operational risks rising across the Middle East. One of the most economically significant developments has been the disruption of transport through the Strait of Hormuz, a vital chokepoint through which a large share of global energy shipments passes. Reduced throughput has created dislocations in natural gas markets and, by extension, industries dependent on gas-related inputs.

How have past conflicts played out?

• Historically, geopolitical conflicts tend to follow a pattern: initial escalation leads markets to price in worst‑case outcomes, followed by gradual stabilisation as more information becomes available or diplomatic channels activate. We currently remain in the early phase of escalation. Two developments are especially important for near‑term risk assessment: (1) the selection of Iran’s new Supreme Leader and their approach to foreign policy, and (2) the degree to which shipping activity in the Strait of Hormuz normalises. A sustained recovery in transport volumes would likely serve as the first meaningful signal of easing tensions.
• Financial markets have remained orderly despite the rising geopolitical uncertainty. The dominant market narrative appears to be that the conflict will be relatively short‑lived and regionally contained. Energy markets have been the primary transmission channel: oil and natural gas prices have moved above their 2025 ranges, reflecting a combination of supply concerns and precautionary positioning. A rapid de‑escalation would likely see these prices revert swiftly. At this stage, the impact on global growth and inflation is expected to remain modest if energy prices do not continue climbing.

What is happening in fixed income markets?

• Bond markets, however, have shown sensitivity to upside inflation risks. Government bond yields have moved higher over the past week, reflecting investor caution. Importantly, the current environment lacks the compounding factors observed after Russia’s invasion of Ukraine, when post‑pandemic supply chain disruptions magnified inflationary pressures.
• Although yields have risen over the past month, they remain below levels recorded at the end of 2025. The recent flattening of yield curves reflects upward revisions in policy rate expectations, particularly in the US, where fewer rate cuts are anticipated due to both strong economic data and geopolitical‑related inflation concerns.

How has performance across equities been trending? 

• Global equities declined over the past week, down 1.8% in euro terms, although year‑to‑date returns remain in positive territory (0.6% local; 1.9% euro). Thus far, we do not observe signs of stress that would suggest a disorderly repricing. More likely, markets will surrender a portion of year‑to‑date gains before consolidation occurs.
• Sector performance reflects a familiar pattern during geopolitical shocks: cyclicals have come under pressure, energy has benefited from higher commodity prices, and New Economy sectors have shown resilience. Communication Services also posted a positive return for the week. This pattern supports a defensive but growth‑oriented sector stance.
• Sector composition and external energy exposure have contributed to US market outperformance over the past week. The US, being a net exporter of energy and having a high weighting to New Economy sectors, has been more insulated from the disruptions affecting global commodity supply chains. Meanwhile, the US dollar has regained its safe‑haven status, reinforcing US asset leadership.
• In contrast, Asia Pacific and euro area markets have underperformed due to their dependence on energy imports, which increases vulnerability to higher gas and oil prices. These regional divergences are consistent with historical patterns during commodity‑driven geopolitical shocks.
• The sector performance table below is included to show how different parts of the global equity market are responding to the conflict in the Middle East. Geopolitical shocks rarely affect all sectors equally, and the current environment is no exception.
• Energy has been the standout beneficiary as rising oil and gas prices boost the sector, while more cyclical and economically sensitive areas, such as Materials, Industrials, and Consumer Staples, have come under pressure. Defensive and New Economy sectors have generally held up better, reflecting investors’ shift toward resilience and pricing power during periods of uncertainty.

Global Equity Sector Performance in Euros

Source: FactSet
As of date: 09/03/26