Beyond the human tragedy, this is an event‑driven shock with the potential to disrupt economic momentum. Historically, such downturns are shorter and less severe than structural or cyclical ones, which is an important distinction. The medium‑term impact will depend more on energy and commodity supply chains than military headlines, particularly through the negative effects on inflation, which was fortunately in a much better position than before Russia’s 2022 invasion of Ukraine.

Using the UK as an example: in February 2022, the Consumer Price Index (CPI) was 5.5% and rising, with the base rate having moved slightly from 0.1% in December 2021 to 0.5% by February 2022. In contrast ahead of this conflict, CPI was 3% and falling, with the base rate at 3.75%, creating a real‑yield differential between then and now of 5.75%. In addition, before the war in Ukraine, oil was already trading near $100, whereas for most of 2025 oil was averaging in the $70’s as there has been plenty of capacity.

For financial markets, the Iranian crisis is fundamentally about global energy and commodity supply risk. The Strait of Hormuz is the world’s most important energy chokepoint, carrying roughly 20% of global oil consumption and Liquefied Natural Gas (LNG) exports. Market impact will hinge on the duration and disruption to energy and commodity supply chains, extent of infrastructure damage across Gulf states and ultimately ‘strategic’ control of the Strait of Hormuz. Typically, following event driven downturns markets stabilise once the initial shock fades.

While escalation risks remain, several mitigating factors support resilience. Households, companies and banks have less leverage, with banks far better capitalised following post‑GFC reforms, and fiscal policy globally remains supportive. This makes a debt‑driven deleveraging cycle unlikely; a shorter event‑driven correction is more probable, though a prolonged conflict could still trigger a deeper downturn.

The Trump administration, mindful of this November’s midterm elections, will aim to seek a swift resolution. Despite his unpredictability, it is notable that much like the softening on tariffs, when market stress intensified, Trump paused strikes on Iranian energy assets and is now actively pursuing negotiations. The US policy backdrop remains highly supportive through “triple easing” across fiscal, monetary and regulatory fronts. The One Big Beautiful Bill extends tax cuts and spending, adding an estimated $3.4 trillion to deficits over the next decade. Kevin Warsh, the nominated next Fed Chair, is seen as a safe pair of hands with deep experience in markets and crisis-era policymaking, while viewed as market‑friendly and aligned with growth‑responsive policy. Deregulation across finance, energy and labour markets continues. Despite signs of labour‑market cooling, consumption should remain supportive provided the wealth effect is preserved and inflation is contained. US household wealth grew by 48% ($64trn) since before the Pandemic in Q4 2019 to Q2 2025 which has underpinned US resilient growth.

In the Eurozone, fiscal policy is a key anchor. Prior to this crisis, the bloc was more concerned about disinflation re-emerging. Germany, with low debt at 60% of GDP, was already planning a record 4.75% deficit to fund defence and infrastructure. Defence orders were rising even before Middle East tensions escalated. Broader Eurozone spending is set to reach its highest level since the GFC, supported by EU funds and increased defence budgets, generating positive multiplier effects throughout the region.

In the UK, despite political disappointment, markets have benefited from several catalysts: renewed overseas investor interest, a 5% tariff advantage versus Europe, increasing merger and acquisitions and an attractive FTSE 100 dividend yield supported by record buybacks. The index’s value tilt from banks, industrials and energy has shifted from a headwind to a tailwind.

The US dollar’s recent risk‑off rally has been muted, and the currency remains expensive on a trade‑weighted basis. Concerns over Fed independence, widening deficits and ongoing reserve diversification argue for maintaining meaningful dollar hedging.

A weaker US dollar would support EM equities, which were extending their 2025 outperformance before the current hostilities. EM valuations remain attractive after a 15‑year underperformance cycle, positioning them well for diversification flows in 2026. China could surprise positively, supported by reduced trade tensions, accommodative policy and the formal revocation of the Three Red Lines policy curbing property leverage. With minimal inflation, China retains scope to stimulate consumption and investment even with higher oil prices.

Gold has pulled back from January’s record highs as macro‑financial forces including the stronger US dollar, higher yields and inflation concerns overwhelm safe‑haven demand. Often during sudden geopolitical shocks, there is a ‘flush effect’ where traders are forced to unwind positions as volatility spikes, which is a classic pattern. With central banks increasing gold reserves, gold remains a hedge against fiscal sustainability risks and retains a constructive long‑term backdrop.

Fixed income has not been defensive during March’s volatility due to inflation fears and rising yields. However, unlike early 2022, today’s real‑yield environment is more attractive, provided the conflict does not escalate into a sustained inflation shock, causing yields to stay elevated.

As Iran is also heavily dependent on seaborne oil exports to fund its ailing economy, and all sides can claim a form of victory, this creates a vested interest in ending hostilities sooner rather than prolonging them. If tensions ease, this episode is likely to be remembered as a typical short‑duration downturn rather than the start of a deeper economic crisis.