In response to the joint US and Israeli attack on Iran, financial markets have so far reacted in a relatively orderly and measured way. Risk, as measured by volatility, has increased across asset classes. However, we have not seen dramatic dislocations in core financial markets, rates, credit, and foreign exchange.
Energy markets, however, have reacted more strongly. Natural gas prices have spiked, reflecting the physical disruption and impairment of certain Gulf-based processing facilities. Oil prices briefly crossed the psychological threshold of one hundred dollars per barrel, while shipping in and out of the Strait of Hormuz slowed dramatically. Monday’s comments by President Donald Trump suggesting that the conflict may be nearing an endpoint subsequently brought oil prices back near ninety dollars per barrel, underscoring how sensitive energy markets are to perceptions about the duration of the conflict.
Predicting market movements in moments like this is extraordinarily difficult, and it would be unwise to offer precise forecasts. Instead, two variables deserve particular attention.
The first variable is time. Energy demand tends to be relatively inelastic in the short run. Homes still need heating, vehicles still require fuel, and factories must continue operating. As a result, when disruptions occur in energy supply chains, markets tend to focus less on demand destruction and more on the persistence of supply constraints.
If supply disruptions persist, prices tend to rise. Higher energy prices often feed into inflation expectations, which can ultimately influence monetary policy. Central banks may respond by tightening financial conditions, which in turn can affect interest rates, currency valuations, and economic growth. In this way, what begins as a geopolitical disruption in energy markets can gradually propagate through the broader global economy.
The second variable is uncertainty. Financial markets can absorb significant shocks when the strategic path forward is reasonably clear. What markets struggle with is ambiguity. When investors lack clarity about the trajectory of a conflict or the potential for escalation, they demand a higher premium for bearing risk. This manifests through elevated volatility, wider credit spreads, and shifts toward perceived safe-haven assets.
These same two variables, time and uncertainty, play a central role in how financial markets price geopolitical risk.