Middle East Conflict and Global Markets: A Wait-and-See Approach from Central Banks

Global markets remained highly sensitive to developments in the Middle East during the past week, with raw materials markets taking the lead. Oil prices experienced significant volatility, surging to around $120 per barrel on Monday before briefly falling below $90 amid hopes for a de-escalation following comments from President Trump. From a financial perspective, the key concern revolves around the Strait of Hormuz.

The Strait of Hormuz: A Critical Chokepoint

According to Mark Dowding, CIO of RBC BlueBay Asset Management, the stability of oil flow through the Strait of Hormuz is paramount for the global economy. “Simply put, if oil can continue to flow, the potential economic disruption could prove short-lived. In contrast, a closure of the strait, even temporary, represents a stagflationary shock globally,” he explains. RBC BlueBay is actively monitoring the situation.

Inflationary and Growth Impacts

Dowding’s analysis suggests that the inflationary impact will depend on the duration of trade disruptions and the ability to reroute production. He estimates a potential temporary increase of around 1% in CPI readings and a 0.5% reduction in growth forecasts. Niall Gallagher, European equity investment manager at Jupiter AM, highlights the risk to European economies from global gas prices, warning that a prolonged supply interruption could significantly increase electricity prices.

Central Bank Response: Caution Prevails

With meetings scheduled for the Federal Reserve (Fed), the European Central Bank (ECB), the Bank of England (BoE), the Swiss National Bank (SNB), and the Bank of Japan (BoJ), policymakers are navigating a challenging situation. Sean Shepley, senior economist at AllianzGI, anticipates that central banks will maintain current interest rates, emphasize caution, and avoid firm commitments regarding future measures.

Xavier Chapard, strategist at LBP AM, believes central banks will adopt a wait-and-see attitude, signaling readiness to act if necessary. He notes that ECB members have consistently advocated for calm in the short term, and the Fed is likely to reinforce its commitment to stable rates, leaving room for both increases and cuts starting in the summer.

Rate Cut Possibilities in 2026

Dowding suggests that a Fed rate hike is unlikely given current events and anticipates potential rate cuts later in 2026 if the conflict resolves and oil prices decline. He also observes that the Bank of England faces a weakening economy and a bias towards monetary easing, potentially leading to easing measures later in the year.

Investment Strategies in a Volatile Market

Gallagher suggests that market volatility could present selective opportunities, particularly in economically sensitive consumer stocks. He also notes a tendency for global financial markets to seek refuge in US capital markets and the US dollar during times of uncertainty, potentially boosting the relative performance of US assets.

Muzinich & Co. Is adopting a defensive position, avoiding increased exposure to credit risk. Eric Muller, Director of Market and Product Strategy at Muzinich & Co., points to the potential for value generation and spread dispersion, creating future investment opportunities. The banking sector is highlighted as an attractive area due to increasing yields.

Muller concludes that a constructive medium-term view remains, favoring a value and carry-based approach. He suggests that hedging in high-yield credit could be beneficial as tail risk associated with energy prices increases.