Middle East conflict: 100 days on
What’s changed? It is now over 100 days since the Iran conflict began. A US-Iran ceasefire appears to be holding in name, but the two sides have traded blows in recent days. The pattern of late appears to be exchanges of strikes rather than continuous kinetic conflict as in the early days of the war. We think this reflects a reluctance to resume the conflict on the part of both the US and Iran. Our “status quo” scenario remains our central scenario.
Official data continue to suggest that transits through the Strait of Hormuz (SoH) are running at only a few ships per day. There are reports that more ships are moving through, but we are unable to verify that. Even if the numbers are under-reported, we continue to see vastly less oil and other goods are moving through the SoH compared to before the conflict. OPEC crude oil production has fallen by a little over 10mn bbl/day compared to January.1
Thus far, the global economy and markets have dealt with this supply disruption far better than many would have anticipated given that official data continue to show very few ships are transiting the SoH. Equally, though, we did not anticipate that other parts of the energy system would adapt so quickly. Notably, we have observed increased pipeline flows through Saudi Arabia and the United Arab Emirates (UAE).2 The UAE has exited OPEC and has stated that its pipeline capacity will double this year.3 Meanwhile, US oil and gas exports have increased.4 Inventories around the world, including from China, are being drawn down (and China has reduced its imports).2 4 Some demand destruction has taken place too, but in limited areas thus far, in our analysis. Our number one question: How long that can continue?
Markets: Oil is currently trading lower than we anticipated based on our scenario analysis overleaf.4 The inflation-adjusted price of oil remains only a little higher than average compared to the last two decades.5 We suspect that recent drawdowns on savings rates have helped explain what looks to be consumer resilience in the data.4
Equity markets followed our view on the historical geopolitical shock playbook closely: They sold off and then recovered. US, Emerging Markets, and even Europe ex UK equities are trading higher now than they were on 27 February.6 We take this as a reminder for investors that staying invested is often the best course of action amid volatility. US equity markets have led the rally. Fixed income markets continue to face headwinds and are not a diversifier in this type of scenario, in our view.4
Central banks: Prior to the conflict we expected rate cuts from the Federal Reserve and the Bank of England in 2026. Markets are now pricing hikes in 2026 for both.7 Our base case is that neither will hike this year. Raising rates will not help the supply situation, in our view. Rather, it will likely exacerbate the strains on those feeling it most: lower income households. The European Central Bank, meanwhile, has lower policy rates and therefore has more scope to hike this year, in our view.
What to watch: We continue to watch transits through the SoH, particular for any sign of ships entering the Persian Gulf. We continue to monitor passthrough effects from higher energy prices, particularly through inflation and producer price readouts. Inflation expectations and wage pressures are key too. Upward pressure there may require us to adjust out central bank views. We are watching closely inventory levels. The US Strategic Petroleum Reserve for example has been tapped aggressively in the last four weeks.2 4 That has been helpful, in our view, but limits could be hit late this year if this run rate is continued – see chart overleaf.
So what? As the “status quo” holding pattern (see scenario overleaf) drags on, we continue to anticipate oil trading nearer $100/bbl before moving lower through the second half of the year. Throughout this period, we have advocated prudence rather than conviction. We have not changed our core views much and still think over the medium-term risk assets and non-US markets will perform relatively well. We remain wary of taking duration risk in fixed income.
Our latest scenario set has been consolidated, 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: 65% | Conflict resumes: Subjective probability: 15% | |
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Ceasefire holds and moves towards peace deal. All sides cease strikes. Strait of Hormuz reopens in June and tanker traffic increases meaningfully, above 50% of pre-crisis level by end of June |
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Ceasefire holds. Limited strikes by Iranian proxies in the region and periodic kinetic events. Strait of Hormuz tanker traffic, in both directions, shows gradual increase in late June but remains well below 50% of pre-crisis |
Ceasefire breaks down for multi-week period. Iranian proxies continue or ramp up attacks in region. Strait of Hormuz traffic remains heavily impaired through July. |
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Potential market implications
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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 10 June 2026. Indices in bottom right chart are: 60/40 = 60% ACWI Eq, 40% Global Bonds; Global Bonds = BBG Global Agg; (Eq) market 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; bond indices are EUR hedged. 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.
