The escalating armed conflict involving the USA, Israel, and Iran has led to a sharp downturn on global stock exchanges. Fuel prices in the United States recorded their largest single-day increase in three years, and investors are massively fleeing towards safe-haven assets such as the dollar. Rising inflation expectations have drastically reduced the chances of interest rate cuts by the Fed and the ECB in the near future.

Sharp rise in energy prices

Oil and gas prices have skyrocketed due to supply disruptions from the Middle East and problems with exports from Russia.

Crash on global stock markets

Indices from Tokyo to London are recording record declines, with Japan's Nikkei losing over 1500 points in one morning.

Uncertainty about interest rates

Central bankers are holding back on decisions to cut rates due to the unpredictable impact of the war on global inflation.

The escalation of hostilities in the Middle East has triggered a sharp reaction on financial markets, destabilizing the global economy. Investors are anxiously observing the effects of strikes on Iran, which could cost the US economy up to 210 billion dollars. This situation directly impacts the energy sector, where disruptions in oil and gas supplies have caused sudden price spikes. Consumers in the USA felt this particularly acutely, where gasoline prices rose the most since 2023. Simultaneously, Russian oil exports are grappling with problems due to drone attacks and difficult weather conditions, limiting the supply of the raw material at a time of critical demand. Stock markets in Europe, Canada, and Japan recorded their deepest declines in months. Japan's Nikkei index lost over 1500 points during the morning session, and British stocks saw their biggest slump in nearly a year. Representatives of central banks, including Neel Kashkari from the Fed and Mārtiņš Kazāks from the ECB, signal that it is too early to precisely assess the war's impact on inflation. Uncertainty about the Fed's next steps led to market bets on imminent interest rate cuts being withdrawn. Investors are currently choosing the dollar as a safe haven, which is hurting emerging market currencies. The Middle East accounts for about one-third of global crude oil production. Historically, any conflict in this region has led to energy crises, such as the 1973 oil shock, which permanently changed Western macroeconomic policy. In the transport sector, the conflict has forced drastic changes in civil aviation and shipping. London marine insurers have expanded high-risk zones in the Persian Gulf, resulting in increased freight rates. Experts point out that the traditional investment portfolio based on bonds and stocks (the 60/40 model) proves insufficiently resilient to shocks caused by a resource war. Although Egypt and other countries in the region are trying to calm the mood, global energy supply chains remain under enormous pressure, presenting central banks with a dilemma between fighting inflation and supporting fading economic growth.„War creates uncertainty for rate path” — Neel Kashkari

Mentioned People

  • Neel Kashkari — President of the Minneapolis Fed, commenting on the war's impact on inflation.
  • Mārtiņš Kazāks — Member of the ECB Governing Council, calling for caution in monetary policy.