Overview
Three months after hostilities began in Iran, global markets show a pronounced split between beneficiaries and sufferers. A near 40% surge in oil prices has altered expectations for inflation and rates while bankrolling a renewed case for the dollar as a safe-haven asset. At the same time, pockets of equity strength tied to artificial intelligence have helped offset some of the conflict's market damage.
Oil's outsized effect on market dynamics
Crude prices have climbed to levels well above $100 a barrel and at one point in early April were almost double where they stood before the war. The sharp rise - roughly 40% from pre-conflict levels - has forced policymakers and market participants to re-evaluate inflation trajectories and potential central bank responses.
Supply-side responses have been sizeable: major economies coordinated a record release of 400 million barrels from strategic reserves and traders have worked to source alternative supplies, actions that have helped to cushion some of the immediate loss of oil entering the market. Nevertheless, commentators and market data point to mounting strain on the global energy system as the conflict endures.
Equities: AI optimism cushions broader weakness
Global equity markets have, on balance, absorbed the shock. Renewed enthusiasm for AI and hopes for a peace settlement have outweighed some of the negative effects of the conflict. U.S. equities are trading at record levels, and South Korea's Kospi has also reached record territory. European shares sit close to all-time highs.
Within tech and semiconductors, memory-chip stocks continue to benefit from the AI narrative. SK Hynix surpassed a $1 trillion market valuation for the first time on a recent Wednesday, joining Samsung Electronics and Micron Technology in achieving that milestone as investors pile into AI beneficiaries.
But the gains are uneven. The S&P 500 passenger airlines index has fallen by more than 6% since the conflict began amid disruptions to global flight patterns. Luxury goods have also been vulnerable: a constructed global luxury basket is down about 10%, reflecting investor concern that rising inflation could constrain discretionary spending.
HSBC Private Bank global CIO Willem Sels said the bank has taken an underweight position on consumer-related goods and services. "It provides us with a hedge in case the conflict accelerates," he said. "Consumption has done reasonably okay, certainly in the U.S. where you have better-off households who still consume a lot and are benefiting from AI."
The dollar's safe-haven role
The U.S. dollar has emerged as one of the conflict's clear winners. Since the war began it has appreciated about 1.5% against other major currencies, outperforming the Swiss franc and the yen. Higher U.S. Treasury yields have reinforced the currency's appeal, even as some market participants point to ongoing U.S. policy uncertainty and the possibility of later dollar weakness after the conflict subsides.
Van Luu, global head of solutions strategy at Russell Investments, said: "We are currently neutral but still expect a weaker dollar in the medium term."
Asian currencies and energy import dependency
Asia has been particularly exposed because roughly 80% of oil that previously transited the now-shuttered Strait of Hormuz was purchased by Asian buyers. The rerouting and higher price of available fuel have weighed on regional growth and left several Asian currencies among the worst performers since the conflict's outset.
India's rupee, Indonesia's rupiah and the Philippine peso have all slid to record lows against the dollar. In response, some countries have raised interest rates or deployed foreign-exchange reserves to ease the pressure on their currencies. Sri Lanka surprised markets with a 100 basis point rate hike on a recent Tuesday.
China's yuan has been an exception, holding up better than regional peers. The yuan's relative resilience has been attributed in market commentary to substantial domestic energy reserves that reduce exposure to higher imported fuel costs.
Macroeconomic spillovers
The higher oil price has reverberated through the global economy, hitting countries that rely on imported energy the hardest. In the euro zone, S&P's composite purchasing managers index indicated that economic activity contracted at the sharpest pace in more than two-and-a-half years in May. The European Central Bank flagged in a report that the war's effects are amplifying Europe's financial vulnerabilities.
British firms reported a fall in activity and a rise in input prices as energy costs climbed. By contrast, the United States - described in market commentary as largely self-sufficient in oil and gas and benefiting from robust AI investment - has experienced a milder economic impact, though domestic gasoline prices have still risen to a four-year high of $4.56 per gallon.
Bonds under pressure
Government bond markets have been among the losers. The oil-driven inflation risk has led traders to price in higher interest rates, while expectations of increased fiscal and military spending have put additional upward pressure on yields, particularly at the long end of the curve.
Market moves suggest the Federal Reserve may soon abandon an easing bias. U.S. 30-year Treasury yields have climbed to their highest levels since 2007, trading above 5%. In Europe, German Bund yields have reached their highest point in over 15 years as markets increasingly price in at least two European Central Bank rate hikes by year-end.
Conclusion
Three months into the conflict, markets display a distinct division: oil and the dollar have been clear beneficiaries while energy importers, certain currencies and government bonds have borne much of the strain. Equity markets overall have held up thanks largely to AI-linked enthusiasm, but the economic and financial implications of sustained higher energy prices continue to loom large.