Middle East conflict: Seven weeks on
The below is our view as of 21:00 GMT on Sunday 19th April
What’s changed? Contrary to our expectation last Sunday, markets did not react negatively to reports that the US Navy was blockading the Strait of Hormuz (SoH). The US later clarified the measures only applied to ships entering or leaving Iranian ports. Markets performed well, suggesting investors expect a near-term resolution, a resumption in trade flows, and only a temporary hit to growth and inflation.1
The US-Iran ceasefire held, and a fragile 10-day Israel-Lebanon ceasefire was also announced. As part of the ceasefire, it seemed the SoH would reopen, though vessels may need to use a route through Iranian waters near Larak Island. But at the time of writing the SoH appears closed again. 53 ships have officially passed through the SoH in the last seven days with 17 on Saturday 2 – the most since the start of the conflict.
We continue to see SoH trade flows as the most economically meaningful data point but recognise the ceasefire and talks as a step in a positive direction. We therefore marginally increase our probability of a further de-escalation.
Markets: Rebounding. On Friday, 17 April, front-month Brent closed at the lowest level since the start of the conflict, and global equities rallied, led by the US and emerging markets. US equities on Friday closed 4% (in EUR terms) above their 27 February level and at a new all time high. Many other markets are close to their 27 February level – see chart overleaf. The US dollar weakened last week and the DXY index is now only 0.5% above its 27 February level.1
Government bond yields remain above their levels at the outset of the war, while some of the best returns have been in credit.3 This is a reminder that we think the private sector is resilient and can weather shocks.
Recent market moves are another reminder not to panic or radically change positions in the face of troubling headlines, in our view.
Central banks: Hikes being taken out. In March, oil prices drove rate expectations, in our view, while inflation expectations are likely the better guide. Inflation and rate expectations rose in March but have eased in April. Given the nature of the shock, they remain well anchored across much of the world and do not, in our view, justify hikes from the Federal Reserve, European Central Bank or Bank of England. Markets are now pricing less policy tightening risk than a week ago.4
What to watch: SoH traffic. We still think the key data to watch is the number of vessels transiting the Strait of Hormuz. Headlines have improved, but we have yet to see a meaningful increase in traffic. Some countries may face supply shortages in the coming weeks as the delivery gap begins to bite, and even with a quick reopening there will be disruption to commodity flows in the near term. Even so, markets may look through near-term disruptions if investors remain confident that trade flows will normalise.
So what? Absent a near full resumption of trade through the SoH and meaningful peace deal in the near term, we still think $80 is likely a lower bound for front-month Brent this year – but are cognizant that markets are trading more positively than we might have previously anticipated. A geopolitical risk premium is likely to persist for some time. Given the news flow and our scenario probabilities, we remain positive on equities and prefer non-US markets over US markets. We still expect the USD to be lower by year-end. However, news can change quickly, so prudence rather than conviction should guide positioning still.
We have updated our scenario set overleaf.
Scenarios
We frame scenarios around conflict duration, energy flows, and damage to energy infrastructure.
Near-term rapid de-escalation: Subjective probability: 20% |
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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 April and tanker traffic increases meaningfully, above 50% of pre-crisis level before May |
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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
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Potential market implications
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Conflict resumes: Subjective probability: 25% |
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Conflict escalates: Subjective probability: 5% |
Ceasefire breaks down after two weeks. Iranian proxies continue attacks in region. Strait of Hormuz traffic remains impaired up 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., International Energy Agency (IEA), Our World In Data, as of 19 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.
