War with Iran puts energy, inflation and global markets on edge

• The US and Israeli attacks on Iran will affect energy markets, transport costs, inflation risks and financial conditions — but everything depends on how long the conflict lasts. Although a prolonged war could trigger an inflation shock similar to that seen in 2022, we still expect a relatively short-lived escalation, with oil prices averaging USD 70/bbl (more than 15% above previous estimates; the peak should reach USD 85/bbl), while the consequences for global GDP and inflation should remain limited. This would not alter the course of the ECB or the Fed, because in Europe and the United States a 10% increase in oil prices leads to an approximately 0.1–0.2 percentage point rise in inflation in the short term. A conflict lasting longer than four to six weeks would have a bigger impact on the economy and the markets: three months can be seen as the turning point toward trend reversal risk and a recession scenario. However, the US administration has an incentive to end the conflict quickly, because higher oil prices worsening the affordability crisis could mean less support in the November midterm elections.
• Shipping through the Strait of Hormuz — critically important for 30% of global hydrocarbon flows — and disruptions in oil production in the Persian Gulf remain the key channels through which the conflict affects the economy. The immediate market reaction was driven more by maritime shipping disruptions than by a shortage of the raw commodity itself: oil prices rose to around USD 82/bbl (+13% after the market opened on March 2), and shipping data currently show that more than 200 tankers and LNG vessels are anchored outside the Strait of Hormuz, reflecting war-risk insurance problems and a precautionary suspension of operations. A prolonged conflict with major disruption in the Strait of Hormuz could push oil prices to USD 100/bbl, but by the end of 2026 they should still return to around USD 70/bbl as the market ultimately adjusts. In an extreme tail-risk scenario, in which the Iranian regime attacks the region’s energy infrastructure on a larger scale and disrupts shipping through the strait, Brent oil prices could rise above USD 130/bbl before stabilizing at USD 80/bbl by the end of 2026.
• For markets, policy constraints shape the backdrop, because rising inflation concerns could delay rate cuts, keeping volatility elevated despite only a moderate price correction so far. Oil-driven inflation is likely to continue putting pressure on interest rates and weakening expectations for monetary easing. Elevated valuations leave equities and credit vulnerable if energy costs remain high and growth slows. Defense, consumer staples and the energy sector (especially upstream oil and gas, LNG outside the Persian Gulf and some refineries) are currently in a better position, while sectors exposed to macro conditions and energy intensity continue to struggle (e.g. airlines, petrochemicals, etc.), and the technology sector remains in a mixed position. The recent rise in CDS hedging costs may help limit spread widening. On the other hand, private markets may see slower private equity distributions and a slight increase in private debt spreads. Markets are facing diverging outcomes, which requires positioning for the base case while hedging against regime-change risk. In the base scenario, the short end of the curve remains anchored, the belly benefits from growth repricing, and the long end drifts toward 4.3% for 10-year US Treasuries and 2.7% for German Bunds; in the tail-risk scenario, inflation pushes these up to 5.0% and 3.2%, alongside the rebuilding of term premia and the loss of nominal bonds’ hedging qualities. Equities may undergo a moderate correction before returning to high single-digit returns in the base scenario, but fall by around 20% in the extreme scenario as persistent energy inflation lowers discount rates and profits. In the base scenario, investment-grade corporate bond spreads remain around 85 bps, while in the extreme scenario they widen to 125 bps. Private markets diverge: infrastructure returns amount to 10% in the base scenario and 6% under stress, private equity ranges from +12% to -12%, and private debt spreads widen from 500 to 650 bps as coverage metrics weaken.

Conflict scope and duration: three scenarios for assessing the impact The United States and Israel attacked key military and civilian infrastructure targets in Iran after weeks of failed diplomatic negotiations over a new nuclear agreement. These strikes killed Supreme Leader Ayatollah Ali Khamenei and many senior Islamic Revolutionary Guard Corps and intelligence officials, raising questions about the country’s future leadership. Unlike the short war of June 2025, the United States announced “major combat operations”, making this conflict fundamentally different in terms of duration and escalation risk. Iran responded by attacking US military infrastructure in the Persian Gulf and the wider Middle East, disrupting air traffic and economic activity. The key questions concern the impact of the conflict on energy markets, as well as the potential tail risk of escalation into a broader regional war.

This non-linear geopolitical shock will affect energy markets, shipping costs, inflation risks and financial conditions. The escalation significantly increases the probability of tail risks, especially in the Strait of Hormuz, a critical chokepoint through which around 20 million barrels of oil per day and 30% of global seaborne hydrocarbon trade (oil and LNG) pass. Initial indicators already point to serious operational disruptions: after the attacks, crossings fell by more than 70%, and major shipping lines (including Maersk) are temporarily avoiding the Strait of Hormuz while reassessing routing decisions every 24 hours. Iran’s Revolutionary Guard has reportedly warned commercial ships against passing through the strait via VHF radio transmissions, even if enforcement remains only partially effective. Given the critical importance of the Strait of Hormuz for global energy flows, even a partial disruption would constitute a larger shock than the recent incidents in the Red Sea.

As the conflict develops, its length will determine the scale and persistence of its impact on the global economy. President Trump mentioned a four-week window needed to secure lasting negotiations and a change in the Iranian regime toward a “pragmatic leader”. If that happens, high oil and gas inventories should make the shock manageable for the world economy. Other key issues include Iran’s military ability to sustain a counteroffensive — Tehran’s missile stockpiles remain a question mark — as well as the White House’s willingness to continue the offensive. President Trump said the attacks would continue until military goals were achieved (without specifying those goals), but he also offered the Iranian regime a path to de-escalation, an end to the offensive and sanction relief if a pragmatic leader is chosen. President Trump is motivated to end the offensive sooner rather than later, because higher oil prices worsening the affordability crisis could negatively affect the November congressional midterm elections.

Transmission channels: macroeconomic and market consequences

Transmission mechanisms are multi-layered and while some are already active (energy prices), others may still be disrupted.

1. Everything revolves around energy prices. The ongoing conflict in Iran has led to retaliatory attacks that disrupted energy transportation and quickly spread across the Persian Gulf. The direct market reaction reflects shipping disruptions rather than supply shortages at the production level: oil prices rose to around USD 82/bbl (+13% after the market opened on March 2), and shipping data currently show that more than 200 tankers and LNG ships are anchored outside the Strait of Hormuz, reflecting war-risk insurance problems and precautionary pauses in operations. In Allianz Trade’s base scenario, assuming a US-Iran agreement within four weeks, combined with a change of power in Iran, Brent oil prices could rise to USD 85/bbl, but should be around USD 70/bbl by the end of 2026. If the conflict drags on and disruptions in the Strait of Hormuz become significant, oil prices could reach USD 100/bbl, but should still return to around USD 70/bbl by the end of 2026 as the market gradually adjusts. In the escalation tail-risk scenario, in which the Iranian regime attacks regional energy infrastructure and disrupts shipping through the strait, Brent could rise above USD 130/bbl before stabilizing at USD 80/bbl by the end of 2026.

Timing is critical: the longer the disruption in the Strait of Hormuz or in hydrocarbon extraction and processing (in case of infrastructure damage), the greater the risk of rising global energy prices. Recent production announcements (i.e. an OPEC+ supply increase of 206,000 barrels per day) will not calm the markets, because they are economically marginal and still need to pass through the strait. For Europe, gas remains a key vulnerability factor. Almost all LNG from Qatar passes through the Strait of Hormuz, and around one-fifth of global LNG trade moves through this chokepoint. Disruptions therefore quickly spill over into global LNG spot pricing and physical availability. Since winter in the region is ending, this is not an immediate threat, but prolonged disruptions could increase gas bills during the storage refill season. Strategic buffers are also asymmetric. The EU requires strategic net reserves equal to 90 days of demand for imported crude oil, and as of February 28 EU gas storage stood at 30% (compared with 38% a year earlier). Japan’s emergency oil reserves amounted to 254 days of consumption, while LNG inventories covered around three weeks. India has reserves for around two months of import cover, and China around 90 days. However, some emerging economies have smaller buffers. Thailand, for example, decided to ban fuel re-exports to protect domestic supply. To avoid another 2022-style inflation shock, confidence in shipping must be restored and tensions quickly de-escalated.

2. Inflation and central bank responses will depend on the length of the conflict and the fiscal policy reaction function. The biggest concern is an inflation shock caused by higher oil prices. In Europe and the United States, a 10% rise in oil prices leads to a short-term increase in inflation of around 0.1–0.2 percentage points. Allianz Trade’s new base case of USD 70/bbl compared with around USD 60/bbl would therefore have only a small, negligible impact on inflation, leaving the ECB and Fed on their current course. However, in a prolonged-war scenario, with oil surging to USD 100/bbl or more, inflation would rise by around +0.5 percentage points. At the same time, rising bunker fuel prices could also transmit the conflict to the broader economy, likely pushing container freight rates higher. Since fuel accounts for around 35% of total operating costs, and bunker fuel prices have risen by around +20% over the past month, a 40–50% increase in fuel costs could translate into 15–20% higher freight charges by carriers to offset the impact. This could ultimately add 0.3–0.5 percentage points to inflation, since maritime shipping usually represents 2–3% of the final retail price of manufactured goods. Although a prolonged war could push bunker fuel prices even higher, we do not expect ocean freight rates to reach their post-Covid peaks, because trade growth is slowing in 2026, fleet capacity is set to increase by around +8% y/y, and rerouting has become standard practice.

However, the ECB and the Fed would likely respond differently to higher inflation, given differing economic conditions. In the eurozone, inflation and inflation expectations are already anchored around the target, making second-round effects from higher energy prices on broader price and wage dynamics less likely; the ECB would likely look through this negative supply shock and keep rates unchanged at 2%, as in Allianz Trade’s base scenario. In the United States, inflation has remained above target since 2021, and recent data suggest price pressures are far from contained (in January core PPI accelerated to +3.6% y/y). In addition, growth momentum is more resilient than in the eurozone, increasing the risk of inflation persistence if the central bank remains too accommodative. We therefore expect the Fed to refrain from further cuts in 2026 (versus Allianz Trade’s base-case expectation of a June cut) and keep rates elevated at 3.75%. Possible fiscal responses by governments, as seen in 2022–2023, would also create upside inflation risks, making central banks more inclined to keep rates unchanged or even raise them rather than cut. However, given tight fiscal conditions in many countries, government support would likely be limited to symbolic measures such as tax cuts on energy products.

3. Implications for the fuel sector: In Allianz Trade’s base scenario, energy price dynamics represent primarily a volatility shock rather than a lasting supply shock, with oil prices briefly moving higher and then normalizing as the conflict de-escalates and flows through the Strait of Hormuz remain broadly unchanged. Taking into account the risk premium in transport costs and the temporary rise in insurance and futures costs, the main beneficiaries are extraction companies, especially producers outside the Persian Gulf that have direct exposure to spot prices. Integrated oil majors would also benefit from a short-term rise in cash flows and improved trading results, LNG exporters outside the Gulf could opportunistically expand margins in Europe and Asia, some refineries would benefit from higher middle-distillate crack spreads, shipping companies could use heightened geopolitical risk and oil-market uncertainty to raise freight rates or apply surcharges, and the defense sector would also benefit from the current situation. Relative losers include airlines, which face higher jet fuel costs (with limited ability to pass them on immediately to passengers) and operational disruptions in the region; petrochemical producers exposed to raw material inflation and weaker downstream margins; European utilities with large gas consumption, which are sensitive to LNG price shifts and political constraints on tariff adjustments; and luxury goods sectors in energy-importing economies, where temporary fuel inflation erodes real incomes and weakens confidence.
4. Rising liquidity risk with more uncertain Fed support. A sustained Brent price of USD 85–100/bbl would be a major shock to hedging instruments and a significant balance-sheet constraint for their main dealers and/or banks (especially European ones). As demand for USD rises (hedging, energy imports, etc.), the EUR/USD basis would widen further from the current -25 bps. We are still far from crisis levels. During the March 2020 liquidity crisis, it hit -90 bps before the Fed opened swap lines and stabilized it again. If the Strait of Hormuz were blocked for longer and swap lines became a more pressing issue, (European) dealers could face a funding gap. The difference is that Kevin Warsh as the new Fed chair may be more reluctant to expand the balance sheet for the sake of international monetary stabilization.
5. Sharpened market reactions can be expected. Because Middle East shocks over recent decades have generally been short-lived, markets are currently leaning on a base-case assumption of rapid stabilization. However, the risk distribution has clearly changed. The VIX has already risen above 25, and the term structure is now deeply inverted, with futures implying a fall back to the long-term average of around 22 in just three weeks. Oil-driven inflation risk creates greater rate volatility, especially if markets first price in lower safe-haven yields before repricing inflation. This should favor the short end of the US curve as the cleanest safe-haven asset. Given elevated valuations and earnings expectations, equities and credit remain vulnerable to correction from higher energy prices, interest rates and weaker growth. One can assume that the greatest gains from resource reallocation and escalating geopolitical tensions leading to war will accrue to defense-sector equities. More broadly, non-cyclicals should outperform macro-sensitive and energy-intensive sectors; consumer staples and energy should benefit relative to pressure on chemicals and airlines. The technology sector, which has been under pressure in recent months, may find support in lower cyclical risk, but pressure remains because higher data-center financing costs and higher rates reduce the attractiveness of growth. CDS hedging by investors in recent months has offset the rise in corporate bond risk. These recent risk-management moves should help limit spread widening. In private markets, the short-term effect will likely be a further freeze in PE distributions and exit activity, as well as some spread widening in private debt (though not to alarming levels). Meanwhile, infrastructure equity is likely to emerge as a clear structural winner regardless of the scenario, because assets linked to energy security, LNG and electricity grids are likely to keep being re-rated higher.
6. Market implications:

1. Interest rates (EUR and USD): The key question is not whether inflation will rise, but whether it will rise enough to alter current rate expectations. Supply-driven oil shocks differ fundamentally from demand-driven shocks in their impact on interest rates. They reduce real incomes and slow growth while simultaneously pushing up headline CPI, creating a policy dilemma that leads central banks to pause rather than tighten. Markets understand this dynamic; historically, the inflation curve’s reaction to supply shocks has been muted relative to the initial move in oil prices. In our base scenario, Brent reaches a peak of USD 85/bbl and stabilizes at USD 70/bbl, adding only 0.1–0.2 percentage points to inflation on both sides of the Atlantic. In this scenario, the ECB keeps its policy rate at 2.0% and the Fed at 3.5%. The rest of the curve would show a stable front end with delayed cuts and a higher long end driven by term premia. In our base scenario, 10-year US Treasuries reach 4.3%, and 10-year German Bunds 2.7%. The most important monetary-policy question is whether nominal bonds preserve their portfolio-hedging role in such an environment. Government bonds did in fact act as a safe haven, even though yields rose. Although this appears to reflect short-term market mechanics (hedge unwinds), it may be the first sign that under supply-driven inflation the traditional stock-bond correlation weakens, as it did during the post-Covid reflation period (Chart 1). If this scenario materializes, it would be a strong argument for shifting duration exposure (a measure of bond price sensitivity to interest-rate changes — the seesaw of rates on one side and bond prices on the other) from nominal instruments to inflation-linked bonds.

Chart 1: Correlation between equities and bonds under supply-driven inflation

Notes: Supply-driven inflation according to Shapiro (2022) versus 12-month rolling weekly correlations for the S&P 500 and 7–10-year US Treasury yields.

Sources: San Francisco Fed, LSEG Workspace, Allianz Trade Research

In the event of a prolonged conflict, the Fed would keep rates at 3.75% not because inflation is demand-driven, but because it cannot afford a second energy-price spiral while inflation expectations are still not fully anchored. In connection with these developments, governments could also implement fiscal measures. Such actions would likely increase sovereign debt issuance, translating into higher term premia. As a result, 10-year US Treasury yields could return to the 4.5–5.0% range and the yield curve could flatten.

1. Public credit (investment grade): Although core credit conditions remain stable in the base scenario, the combination of lower growth and higher interest rates in more pessimistic scenarios poses a challenge for spreads, which are still close to historical lows, especially if liquidity becomes more important. The resilience of the credit market in the base case is due mainly to two key factors: the short duration of the conflict, which limits macroeconomic damage, and stable credit metrics and earnings prospects in an oil-price environment of USD 85–70/bbl. In addition, CDS hedges accumulated by investors in recent months should help limit outflows. Within euro credit, special attention should be paid to the banking sector due to its dominant market role and its position at the intersection of commodity financing and USD liquidity. The sector’s defensive characteristics in the face of sharp oil-price rises may be challenged under more extreme energy-market disruptions if USD liquidity tightens. Given the seniority and quality of investment-grade credit, we expect only moderate spread widening in most scenarios, though extreme scenarios could trigger greater risk aversion and demand cannibalization by sovereign bonds, causing spreads to move toward historical medians, which would also be consistent with credit fundamentals. Even if tail risks materialize, we still expect a return to fundamentals.
2. Listed equities: Elevated starting conditions increase downside risks, especially in the US market. Escalation of the conflict with Iran has raised macro risk in a market already characterized by high valuations and elevated earnings expectations, particularly in the United States. Although risk assets may initially overreact, fundamentals are likely to prevail, and the limited effect on GDP growth should support broader market gains. Non-cyclicals should remain resilient, but energy-dependent industries such as airlines and chemicals may come under pressure. US market valuations, especially in technology, are vulnerable to higher rates or slower growth, which could trigger a shift toward more normalized multiples in a riskier global environment. In adverse scenarios, equity markets could see significant declines — as much as -20 percentage points for US equities — driven by valuation mean reversion (two-thirds) and earnings cyclicality (one-third). With a decline of around -10 percentage points, we would expect eurozone equities to be less exposed to these two factors, but they would still not escape broader risk aversion and capital reallocation toward higher-yielding government bonds.
3. Private capital markets: Infrastructure has proven to be a resilient asset class during this period of uncertainty. The key question is whether private equity and private debt funds have sufficient reserves to withstand macroeconomic shifts without triggering unintended problems in profit distributions. Infrastructure is the only asset class in private markets that draws strength from the very same factors that destabilize everything else. Energy security has become an immediate policy imperative, and capital already allocated to LNG terminals, power grids and pipeline diversification will now flow faster and at structurally higher valuations. In our base scenario, we expect 2026 returns of +10%, which should remain in the +5–6% range even in a prolonged conflict, because the rerating driven by scarcity will prove durable. This resembles the situation of European energy infrastructure after 2022, when it was permanently re-rated and never returned to its previous state.

Private equity is a different story altogether. Portfolio companies themselves are not necessarily the problem; sectors such as staples, healthcare and technology are largely insulated from the shock. However, the transaction machinery that monetizes them struggles when rates and volatility rise, M&A multiples compress and risk appetite weakens. We saw this clearly in 2022, when global deal volumes dropped by around 35% and LP distributions shrank sharply. Our base scenario of +12% PE returns in 2026 turns into -12% in the downside scenario as exit windows close, holding periods lengthen and marks come under pressure, creating real J-curve stress for investors managing liquidity commitments. Private debt is in a stronger position — helped by floating rates, senior secured positioning and tighter, longer underwriting standards in a high-rate environment. We expect middle-market credit spreads to widen from 500 bps in the base scenario to 650 bps in the negative scenario. This reflects pressure on debt coverage ratios in exposed verticals such as energy-intensive industries: chemicals, packaging and consumer discretionary, requiring active portfolio management. In short, private debt markets are not insulated from inflation shocks, but history suggests private assets are more resilient to supply shocks, especially infrastructure (Chart 2).

Chart 2: Historically, infrastructure has outperformed other asset classes in periods of high inflation (average annual return)

Sources: Blackrock (link), Allianz Research

Note: Bloomberg, Barclays. EDHEC for infrastructure equity; NCREIF for global real estate; MSCI for global equities; BBG Barclays Global Aggregate Index TR for global fixed income, as of May 22, 2023 (annual data from 2001). High-inflation periods are periods when US CPI exceeds 2.5%. High-growth periods are periods when US GDP exceeds 2.5%, and low-growth periods are those when US GDP is below 2.5%.

7. Implications for the Persian Gulf region. The first effect of the conflict on the region was the closure of airspace, which disrupted flights worldwide because the Gulf is home to some of the busiest airports in the world (especially Dubai airport). In addition, Iran’s retaliation brought the conflict into the Gulf itself, as missiles were visible on the horizon of major cities and their debris reached several civilian infrastructure sites in Bahrain, the United Arab Emirates and Kuwait. The duration of the war will determine its full impact on the region, because in an import-dependent area food supplies may run low if disruptions in key ports are prolonged, economic activity may be halted and tourist numbers may fall for an extended period. In June 2025, the 12-day war had only a temporary effect on economic activity, consumer sentiment in Saudi Arabia deteriorated only to rebalance a month later, and regional equity indices also suffered temporary losses before staging a V-shaped recovery by the end of June 2025 and closing the month higher. Since in recent years conflicts between Israel, the US and Iran largely left the region untouched, the Gulf is now facing its biggest challenge yet — the stability of the Iranian regime is being called into question, putting local security systems and economic mechanisms to the test.

Table 2: Scenarios after the United States intervention

Sources: Foreign Affairs, Allianz Research

The Middle East region has experienced several foreign interventions and regime changes that provide key lessons for analyzing the current situation — in particular the 1979 Iranian revolution that overthrew the Pahlavi dynasty, and the removal of Saddam Hussein and the Baath Party in 2003.

A decision-making vacuum. The aftermath of the US invasion of Iraq in 2003 — the removal of the country’s top leadership after more than 20 years of rule and the subsequent rise in outside influence (the US and Iran) — led to a complete break in institutional continuity. The result was prolonged instability caused by a devastating blow to the economy and the outbreak of civil war. Years of vacuum at the top and catastrophic socio-economic conditions became fertile ground for the expansion of terrorism.

The strength of the security apparatus. Both during the overthrow of the Shah in 1979 and the invasion of Iraq in 2003, armed forces disintegrated rapidly and desertions were widespread. By contrast, during the most recent protests in Iran there were no recorded defections or public dissent within the leadership against Supreme Leader Khamenei. The Islamic Revolutionary Guard Corps (IRGC) is far more deeply integrated ideologically with the economic and political fabric of the regime. History shows that military force alone does not guarantee quick regime change as long as internal structures remain intact.

Regional spillovers. The 2003 invasion of Iraq triggered mass displacement, and refugee flows reached neighboring countries. Meanwhile, the political impact of the Iranian revolution has been felt across the region for decades. Regime change or destabilization could have unpredictable consequences for surrounding states.

Analyzing recent geopolitical events and their market impact — across equities, bond yields, oil prices, currency swings, gold and IG spreads — is a useful tool for assessing the macro and market impact of the current conflict. History shows that the impact of armed conflicts is usually short-lived and moderate (Chart 4). However, the variety of events, time horizons and geographic reach makes historical analogies far from clear-cut. Equities and oil tend to show the greatest sensitivity, although the direction and scale of price reactions vary. In the oil market, the key issue is supply fears rather than just a temporary rise in the “geopolitical premium”. Prolonged events that trigger structural shifts — such as the first Gulf War or Russia’s invasion of Ukraine in 2022 — generate stronger, though often delayed, market effects. Although it is too early to determine the final outcome of the current conflict with Iran, our tail-risk scenario falls into that second category: it assumes a lasting rise in oil prices over the longer term with cascading consequences for global capital markets.

Chart 4: Historically, market reactions to conflicts have tended to be relatively mild