On Saturday, the United States and Israel launched an attack on Iran's leadership. U.S. President Donald Trump asserted that the action would eliminate a security threat and create an opportunity for the Iranian people to overthrow their rulers. The attack heightened tensions among neighboring oil-producing Gulf Arab nations, amid growing concerns over an escalating situation. Tehran responded by launching missiles toward Israel. The following analysis examines the potential impact of this conflict on global markets.

Oil Prices Surge Oil serves as a primary indicator of tensions in the Middle East. Iran is one of the world's major oil producers. It faces the oil-rich Arabian Peninsula across the Strait of Hormuz, a passage for approximately 20% of global oil supplies. Conflict could restrict the flow of oil into global markets and drive prices higher. On Friday, Brent crude traded around $73 per barrel, having risen by one-fifth since the start of the year. On Saturday, four trading sources reported that due to the attack, several major oil companies and top trading firms had suspended shipments of crude oil and other fuels through the Strait of Hormuz. William Jackson, Chief Emerging Markets Economist at Capital Economics, suggested that Brent prices could climb to around $80 per barrel, a level last seen during a 12-day conflict involving Iran in June of last year. He indicated that a prolonged conflict could disrupt supplies, potentially pushing oil prices to approximately $100 per barrel. Such an increase could raise the global inflation rate by 0.6 to 0.7 percentage points.

Heightened Volatility in Global Markets The conflict is likely to amplify volatility in global markets, which have already experienced significant swings this year due to Trump's trade tariffs and a major sell-off in technology stocks. The VIX volatility index has increased by one-third over the past year, while implied volatility for U.S. bonds has risen by about 15%. Analysts noted that foreign exchange markets would also be susceptible to fluctuations. A Commonwealth Bank of Australia report highlighted that the U.S. dollar index fell by approximately 1% in June. However, this decline was temporary and reversed within three to four days. Analysts at ANZ Bank wrote in a recent report that the extent of any depreciation would depend on the duration and severity of the conflict. If the conflict persists and disrupts oil supplies, the U.S. dollar is expected to strengthen against most currencies, except for the Japanese yen and the Swiss franc. The U.S. would benefit from higher oil and gas prices if supplies are interrupted. Iran swiftly retaliated against Israel. During the outbreak of war in June 2024, the Israeli shekel depreciated by 5%. The currency also declined following an Israeli strike on Iran's consulate in Damascus and when Iran launched missiles at Israel in October of last year. All these events were short-lived, followed by a rapid recovery in the shekel. J.P. Morgan suggested that the situation could differ if the conflict proves more prolonged or if risk premiums increase. The Wall Street bank stated, "This would be especially true if confrontation with Iran also triggers more intensive action against Iranian proxy forces."

Safe-Haven Assets in Focus The Swiss National Bank may face pressure as the Swiss franc, widely regarded as a safe-haven currency during turbulent times, continues to appreciate. The franc has gained 3% against the U.S. dollar this year. Investors may also turn to gold once again. Gold has delivered an impressive performance this year, rising 22% year-to-date. Attention may also extend to silver, which has also performed strongly. The conflict could also boost demand for U.S. Treasury bonds, whose yields have been declining in recent weeks. Bitcoin is no longer viewed as a safe-haven asset. It fell 2% on Sunday and has lost more than a quarter of its market value over the past two months.

Middle Eastern Markets in the Spotlight Trading in Middle Eastern stock markets, including those of Saudi Arabia and Qatar, on Sunday will provide an initial gauge of investor sentiment. These markets are closely correlated with oil prices. However, an escalation of the war could have ripple effects on their economies. Ryan Lymond, CEO and Co-founder of Neovision Wealth Management, said, "I believe markets will trend lower if hostilities continue throughout the day." Depending on the severity of the conflict, Gulf region stocks could fall by 3% to 5%. Saudi Arabia's benchmark index fell 1.3% over the five trading days leading to Thursday, marking its second consecutive weekly decline. Dubai's main stock market, which will reopen on Monday, has also declined over the past two weeks.

Airlines and Defense Stocks Global airlines canceled flights to the Middle East on Saturday. Their share prices could be affected if the conflict continues and more airspace is closed. Demand for European weapons could grow by 10% over the next year.