Middle East conflict: Ten weeks on
What’s changed? Over the past week, tensions around the Middle East conflict have remained high but with hints of diplomatic progress, in our assessment. A fragile ceasefire has been repeatedly tested by naval clashes and drone attacks in the Strait of Hormuz, with the US striking Iranian tankers and Iran threatening retaliation against US assets.
So far, neither the US nor Iran appear willing to resume full-scale hostilities despite these skirmishes, in our view. Meanwhile, both the US and Iran have edged toward negotiation: Iran has now formally responded to a US peace proposal, focusing on ending the war and restoring maritime security.
From an economic and market perspective, official data indicate only one vessel has transited the Strait of Hormuz (SoH) since Tuesday, 5 May.1
Markets: Markets last week appeared to be pricing a potential deal, though risks of escalation remain elevated. Emerging market stocks led global equities higher. UK stocks lagged2. The global energy sector fell as front-month Brent oil futures fell by more than 6% over the course of the week to a little over $101 $/bbl. The USD, as measured by DXY, fell to its lowest level since the start of the conflict.
Central banks: Markets indicated little change to forward rate expectations last week. After the previous week’s packed central bank schedule, the calendar was quiet—except for the Reserve Bank of Australia (RBA), which hiked rates by 25 basis points.1 The RBA hiked because inflation pressures are broadening, in our view. While the Middle East conflict didn’t drive the decision alone, it clearly added to the pressure and was explicitly flagged in the statement.
What to watch: Xi-Trump summit. We continue to believe that vessel transits through the SoH remains the main near-term macro uncertainty and thus the primary data to watch. Prediction markets signal a lower probability that SoH traffic normalises by the end of June.1 In the coming week it is possible that an agreement between Presidents Trump and Xi in Beijing sees China exert some pressure on Iran to cede to some of the US demands and that could lead to a breakthrough in negotiations and ultimately trade flows resuming. It’s a big if, and we will watch closely.
So what? The global economy has shown itself to be far more resilient to this shock than many commentators had predicted in the past. Thus far economic and market data have remained resilient, highlight by still-solid backward-looking hard data and survey data. The chart overleaf shows that consensus global GDP forecasts have shown only modest downward revisions.
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 through 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. |
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Sources: Invesco Strategy & Insights, Bloomberg L.P., and International Energy Agency (IEA), as of 10 May 2026. Equity (Eq) market performance is based on the following MSCI country indices: US Eq = MSCI USA Index; ACWI Eq = MSCI ACWI Index; EM Eq = MSCI Emerging Markets; China Eq = MSCI China; Europe ex UK Eq = MSCI Europe ex UK; UK Eq = MSCI UK; Japanese Eq = MSCI Japan. Returns are measured in EUR. 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.
