Middle East conflict: Six weeks on
What’s changed? On Tuesday last week Trump threatened the end of civilisation for Iran, before a ceasefire was tentatively agreed on Wednesday. As we write on Sunday evening at 21:30 GMT, the US and Iran do not appear to have agreed terms to a lasting peace deal. Military activity in the region has slowed considerably over the last week – but risks remain high that tensions could flare again.
In a strange turn of events, it is now the US that appears to be restricting traffic through the Strait of Hormuz. President Trump is threatening to blockade the Strait commencing Monday morning Washington time. US officials point to lack of progress on the fate of Iran’s nuclear program. Meanwhile, Israel has continued to strike Hezbollah-linked targets in Lebanon while Iran asserts that the ceasefire includes Lebanon.
Markets rebounded. The prospect of some form of peace dividend saw markets react very positively on Wednesday and Thursday. Those parts of the market hit hardest in March rallied most and the USD weakened. Global equities1 are now less than 2% lower than their close on 27th February.2 This is confirmation of our view that any easing in tensions, will likely mean a return to trends that were in place prior to the conflict – i.e. non-US markets outperforming and a weaker USD. Thus, our medium-term views remain intact.
Central banks hikes reduced. Hikes are still priced for the European Central Bank and the Bank of England but fewer than were expected at the end of March.3 Inflation prints will likely come in higher over the coming months, as we saw with US inflation prints last week. We continue to believe central banks will not start hiking unless inflation expectations move meaningfully higher. So far, they appear to have remained within what we view as central bank “comfort zones.”
What to watch now. That a ceasefire was entered into reduces the likelihood of our worst-case scenario but does not, so far, mean that activity in the Middle East and Strait of Hormuz will suddenly return to pre-conflict normality. We accept that there has been a de-escalation in the armed conflict but the scale of the de-escalation and lack of clarity on when trade flows will resume leaves us broadly still in the same place – status quo – from an economic perspective.
Assuming any blockade is short-lived, we would expect to see an increase in west-to-east traffic in the Strait of Hormuz as ships currently in the Persian Gulf take the opportunity to exit. The more important data to watch will be the east-to-west data: Will shipping firms voluntarily enter the Gulf and risk getting stuck if the ceasefire does not hold or Iran decides to resume strikes? From an economic and financial market perspective, this is the most important factor to watch going forward, in our opinion.
So what? We expect renewed pressure on risk assets and upward moves in oil early this week. However, we gradual improvement in conditions (under our first two scenarios) is more likely than not before the end of April. The last week has shown that positioning in too defensive a manner has not helped portfolios and risk assets are primed to rebound on good news. We therefore remain of the view that the prudent response remains caution but staying invested rather than conviction.
Over the remainder of the year, we still prefer non-US markets to US markets and expect the USD will weaken – but it is unlikely to be a smooth ride.
We update our scenario set in the overleaf.
Scenarios
We frame scenarios around conflict duration, energy flows, and damage to energy infrastructure.
Near-term rapid de-escalation: Subjective probability: 15% |
|
Status quo: Subjective probability: 50% |
|---|---|---|
Ceasefire holds and moves towards peace deal. All sides cease strikes. Strait of Hormuz reopens by late April and tanker traffic increases meaningfully, above 50% of pre-crisis level before May |
|
Ceasefire holds and extends after two-week deadline. Limited strikes by Iranian proxies in the region. Strait of Hormuz tanker traffic, in both directions, shows gradual increase in April but remains below 50% of pre-crisis |
Potential market implications
|
|
Potential market implications
|
Conflict resumes: Subjective probability: 25% |
|
Conflict escalates: Subjective probability: 10% |
Ceasefire breaks down after two weeks. Iranian proxies continue attacks in region. Strait of Hormuz traffic remains impaired up to June. |
|
Both sides increase intensity and breadth of attacks. Strait of Hormuz closed beyond July. Further strikes on regional energy infrastructure. |
Potential market implications
|
|
Potential market implications
|
Sources: Invesco Strategy & Insights, Bloomberg L.P., International Energy Agency (IEA), Our World In Data, as of 12 April 2026. Equity (Eq) markets = MSCI Country Indices; Commodities = BCOM Index, Global Real Estate = EPRA Developed Market TR index; Global Bonds = Bloomberg Global Agg Index, Global HY credit = Bloomberg Global High Yield Index, Global IG credit = Bloomberg Global Investment Grade Index, EM Bonds = Bloomberg Emerging Markets Hard Currency Aggregate Index. Returns measured in local currency terms in top-left chart and in EUR in bottom-right chart. Central bank market pricing derived from overnight index swap curves, indicated by dashed lines. Past performance does not guarantee future results. An investment cannot be made directly in an index.
Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns.
