Monitoring Market Impacts of the Iran Conflict

Following the start of the Iranian conflict over the weekend, oil, gold, and the U.S. dollar have surged amid heightened geopolitical uncertainty. 

At the center of the tension is the Strait of Hormuz, a critical chokepoint through which roughly 20% of the world’s oil supply transits daily, with nearly 80% of that oil destined for Asia. As such, energy-importing economies in international markets have borne the brunt of market pressure. 

Price action has been particularly notable in South Korea and Japan, both of which are heavily exposed to energy imports transiting through the Strait of Hormuz. These markets had been among the top performers year-to-date and had attracted strong inflows. Given how crowded the trade had become, the negative news likely exacerbated the downside as investors rushed to de-risk and lock in gains. 

However, if the conflict extends beyond the four-week expected time frame, markets may begin to price in more material economic consequences. A prolonged disruption to energy supply could weigh on U.S. growth while simultaneously increasing inflationary pressures, a difficult combination for policymakers. Rate cut expectations have already adjusted, dipping below two cuts this year. 

The bottom line: In this environment, volatility remains the only constant. The longer the conflict persists, the greater the probability of a broader risk-off event across asset classes. We continue to favor high-quality businesses with durable pricing power and operational flexibility to navigate a more volatile investment backdrop. 

Sebastian Teper contributed to this article.