Beyond the $100 barrel: How to spot the 'second-round' effects before they hit your portfolio.

The ultimate outcome of the Iran conflict depends on Iran's response, leadership cohesion and willingness to return to negotiations.

When information about the Iran conflict is incomplete and headlines move markets in real time, investors need a clear framework to interpret events rather than reacting to every development. When faced with such a macro shock, three variables matter most: scale, duration and second-round effects.

With the Iran conflict, the scale of the disruption is already visible. Constraints on traffic through the Strait of Hormuz are removing a meaningful share of global oil supply and other strategic materials from international markets. The duration of the conflict remains uncertain. Attacks on energy infrastructure continue, tanker traffic has yet to normalize and Iran has signaled both the willingness and capacity to escalate, including through potential mining operations in the Strait.

Although U.S. officials have floated the possibility of a pause in military operations, the outcome of the conflict depends on Iran's response, leadership cohesion and willingness to return to negotiations. Strategically, prolonging disruption increases Tehran's leverage. When time is critical, the absence of urgency to de-escalate is itself informative.

Ultimately, second-round effects will depend on how scale and duration interact. A short-lived disruption may generate temporary volatility in energy prices. A sustained shock would have broader consequences for the global economy, central banks and investor positioning.

Implications for the global economy

A prolonged energy shock would carry deep and lasting macroeconomic implications. As long as transit through Hormuz remains constrained and regional infrastructure continues to be targeted, risks to oil prices are likely to remain skewed to the upside. Conversely, a sustained decline in prices would require visible signs of de-escalation, including rising tanker throughput and fewer attacks on energy assets. Partial fixes or temporary workarounds would likely only stabilize markets briefly.

Energy is a key input for transportation, manufacturing and goods prices. Commodities are a "fast-moving" component of inflation, adjusting more rapidly than services, which are driven by "slower-moving" factors such as housing costs and labor markets. Although goods represent a smaller share of consumer price baskets, they account for a disproportionate share of inflation volatility. As a result, commodity shocks can transmit to headline inflation more quickly than changes in the broader business cycle.

However, the global economy enters this episode in a different position than during the 2022 energy shock following Russia's invasion of Ukraine. Prior to the escalation in the Middle East, U.S. growth was improving, but from a relatively weak starting point. That backdrop suggests second-round effects may be more muted this time. Workers currently have less bargaining power to demand higher wages, reducing the risk that an energy-driven inflation spike becomes self-sustaining.

Central banks and commodity shocks

At this stage, markets are facing a commodity shock, not yet a stagflationary one. The distinction matters. Economic theory suggests policymakers should often look through supply-side inflation shocks to support growth.

But risk management argues for caution from central banks. The experience of the postpandemic inflation surge has made central banks more sensitive to the risk of inflation expectations becoming unanchored. Until there is greater clarity on the duration of the energy shock and its transmission to prices, caution is likely to dominate policy decisions.

Three signals investors should watch

The Iran conflict reinforces the case for holding real assets in long-term portfolios.

1. Inflation expectations will be critical: Short-term expectations are likely to move with energy prices, but longer-term measures such as 1-year, 1-year forward inflation swaps and 5-year, 5-year expectations will provide a clearer signal about whether markets believe inflation risks are becoming entrenched. A sustained rise in those indicators would likely trigger a more hawkish response from central banks.

2. Correlations between different asset classes offer a real-time guide to how markets interpret the shock. If oil prices and U.S. Treasury yields continue to rise together, markets are likely pricing an inflationary impulse. A reversal in that relationship, with yields falling as oil remains elevated, would signal a shift toward safe-haven demand and growing concerns about economic growth. Finally, the relationship between equities and bond yields provides an additional clue. A negative correlation, like the one seen now, indicates fears of inflation are dominating, while a positive correlation would suggest growth risks are taking precedence.

3. Currency pairs: There is a point where higher commodity prices will lead to demand destruction, which will weigh on growth. These two currency pairs: the Australian dollar (AUDUSD) against the Swiss franc (USDCHF) and the Canadian dollar (USDCAD) against the Japanese yen (USDJPY). This specific currency pairing can help investors gauge the balance between commodity strength and safe-haven demand. When we see a turn in these currency pairs, it'll be a sign that the market is shifting from pricing higher inflation to lower growth.

The Iran conflict reinforces the case for holding real assets in long-term portfolios. In a world characterized by more frequent and persistent inflation shocks, a portfolio that includes commodities, energy infrastructure and inflation-linked bonds can provide diversification benefits. For more nimble investors, commodity prices may find longer-term support and experience shallower pullbacks as supply disruptions encourage countries to stockpile strategic materials.