Middle East conflict: Nine weeks on
What’s changed? The situation is still best described as unstable and unresolved, in our view. While the ceasefire remains in place, reports over the week suggested military options were again being presented to President Trump—including the possibility of an extended blockade of the Strait of Hormuz (SoH). Oil markets appear to be fearing a protracted peace process, if not a possible resumption of the kinetic conflict.
Official data indicate 14 vessels transited the SoH, including 9 moving into the Persian Gulf. There are reports that companies are adapting: The world’s largest container shipper, MSC, is reportedly planning overland routes to link Europe to the King Abdullah port in the Red Sea.1 These factors help mitigate the crisis but are not durable solutions, in our view.
Last week brought the news that the United Arab Emirates (UAE) left the Organization of the Petroleum Exporting Countries (OPEC) on 1 May. The exit of OPEC’s third-largest oil exporter could mean greater global oil supplies when the SoH crisis is resolved, particularly since the UAE had OPEC’s largest spare production capacity (after Saudi Arabia). For OPEC watchers, this news is likely of little surprise given the UAE’s years-long frustrations that its quota increase did not match its capacity growth. It is another sign of further global fragmentation, in our view. OPEC+, without the UAE, met over the weekend and increased its quota – a hollow increase given most production is trapped.2
Markets: Despite the prospect of greater supply down the road, Brent oil futures were focused on the lack of near-term supply and climbed last week. The six-month Brent future moved above $90/bbl for the first time since the start of the conflict.3
Global equities remained relatively unfazed, rising about 0.8% last week, led by US markets again. Emerging market equities closed lower. The energy sector once again outperformed across most regions alongside recent gains in technology stocks.4 The US dollar weakened and government bond yields crept higher. The US 30-year Treasury yield breached 5% for the first time since July 2025.5 We continue to interpret market moves as a reminder not to panic or radically change positions while the outcome remains so uncertain.
Central banks: Turning hawkish? The four major central banks met last week: The US Federal Reserve (Fed), the European Central Bank (ECB), Bank of England (BoE), and the Bank of Japan (BoJ). None changed their policy rates.
Our interpretation of the message from the Fed and BoE: “Don’t expect cuts anytime soon.” The BoE set out three scenarios with two of the outcomes calling for hikes, and one suggesting rates on hold. Our read on the ECB, meanwhile: “We might hike in June.” The committee cited upside inflation risks and downside growth risks. The BoJ held its policy rate at 0.75% but sounded incrementally more hawkish, pointing to higher inflation and lower growth forecasts, and accompanied by a bigger split vote compared to the previous meeting.
What to watch: SoH traffic still in focus. We still think the key data to watch is the number of vessels transiting the SoH. Prediction markets signal a lower probability that SoH traffic normalises by the end of June (See overleaf). Watching how other trade routes open and adapt is also increasingly important, in our view.
So what? Rerouting of energy flows, and increasingly other goods, has helped the situation, and these shifts have been more rapid than many (including us) had expected. But supply constraints are starting to be felt in some key markets.
Over the medium term we remain positive on equities, prefer non-US markets over US markets, and expect the USD to be lower by year-end. However, news can change quickly, so we continue to think that prudence rather than conviction should guide positioning. Our latest scenario set and key charts are shown overleaf.
Scenarios
We frame scenarios around conflict duration, energy flows, and damage to energy infrastructure.
Near-term rapid de-escalation: Subjective probability: 10% |
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Status quo: Subjective probability: 50% |
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Ceasefire holds and moves towards peace deal. All sides cease strikes. Strait of Hormuz reopens by late May and tanker traffic increases meaningfully, above 50% of pre-crisis level before end of May |
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Ceasefire holds. Limited strikes by Iranian proxies in the region. Strait of Hormuz tanker traffic, in both directions, shows gradual increase in May but remains below 50% of pre-crisis |
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Conflict resumes: Subjective probability: 35% |
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Conflict escalates: Subjective probability: 5% |
Ceasefire breaks down. Iranian proxies continue attacks in region. Strait of Hormuz traffic remains heavily impaired to June. |
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Both sides increase intensity and breadth of attacks. Strait of Hormuz closed beyond July. Further strikes on regional energy infrastructure. |
Potential market implications
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Potential market implications
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Sources: Invesco Strategy & Insights, Bloomberg L.P., and International Energy Agency (IEA), as of 3 May 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 EUR in bottom-right chart. 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.
