Over the weekend, the U.S. and Israel struck Iran and its senior leadership, triggering retaliatory strikes across Israel and many Gulf states. This situation is playing out in real time: U.S. crude oil prices have jumped 8%, while U.S. stock futures are down about 1% and European shares down about 2%. These unfolding developments in the Middle East are the latest manifestation of a world shaped by supply through mega forces such as geopolitical fragmentation.

We see global transmission, if any, coming through supply chains: either a curbing of energy transport through the Strait of Hormuz or damage to energy production infrastructure in the region. That creates the potential for a spike in energy prices and stagflation risk. Qatar, a major supplier of natural gas, shut down production after Iranian drone strikes targeted its facilities, sending prices spiking. Saudi Arabia, the world’s largest oil producer, also paused production at a refinery after a drone attack.

These developments are being shaped by three core variables: the duration of hostilities, the degree of disruption to energy transit and the political end-state. Their interaction will determine whether this remains a short-term volatility shock or evolves into something more persistent. A sustained supply shock is a growing risk we are watching closely. We view these events primarily as a volatility shock and would lean against indiscriminate portfolio de-risking. What will matter is how long the conflict drags on. Constraints on firepower and the potential political blowback may mean this intervention lasts weeks, not longer. Yet potential outcomes remain wide even if volatility dies down quickly, as in recent episodes of Middle East conflict.

The outlook for markets hinges on the interaction of the duration of the conflict and any resulting impact to physical energy supplies. A prolonged escalation that materially impairs energy transport through the Strait could trigger a stagflationary supply shock — we see a 10- to 14-day buffer for how energy markets could handle disruptions. Markets are laser focused on escalation risk and the security of energy flows, notably through the Strait — a chokepoint through which roughly 20% of global oil consumption and 20–25% of global natural gas trade transits. Oil markets are globally fungible, yet natural gas markets remain more regionally segmented, implying potentially sharper price dislocations in LNG under severe disruption scenarios. Under a drawn-out conflict, we could also see a persistently higher regional risk premium. In these outcomes, we see dispersion intensifying with clear winners and losers across energy producers and importers, defensives and cyclicals, and policy-flexible versus externally vulnerable economies.

Our bottom line: We are not changing our investment views while eyeing the risk of a more persistent shock. Developments in the Middle East also confirm core elements of our overall macro framing – this is a world shaped by supply, the AI theme remains the main global theme, and this reinforces why long-term government bonds are not reliable portfolio ballast given the potential stagflationary risks from an escalation of this latest Middle East conflict.

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