Iran war: Risk on, energy off
Markets have welcomed the ceasefire, but the energy shock remains unresolved. A prolonged global stagflation shock appears unlikely, but persistent oil supply shortfalls are beginning to strain parts of the global economy. Asset prices should diverge with economic headwinds.
The Persian language is known for its flowery expressions, with a proverb for almost every situation. One captures the idea that postponement itself can create space for a solution—that in delaying an outcome, relief or resolution may yet emerge. In the case of the ceasefire talks, however, delay has not created space for resolution—only prolonged uncertainty.
Geopolitical impact
In our note of 31 March and in subsequent messaging, we have leaned toward a more prolonged energy outage. Our rationale is threefold: (a) Iran retains sufficient threat capability; (b) the current status quo—no war, no energy—is more advantageous to them than to their counterparts; and (c) their track record in negotiations suggests a consistent tendency to run down the clock.
Figure 1: Our current view
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A narrow path to de-escalation
Iran does not have unlimited time though. The economic costs are immense, and the global economy cannot cope with a prolonged closure of the Strait of Hormuz. In plain English, April 2026 likely marks the peak of the Islamic Republic’s global power. From here, leverage only diminishes—giving the regime an incentive to strike a deal, but also to maximize economic disruption before geopolitical blowback reaches its peak.
The good news is that the contours of a deal are relatively clear. Any agreement will hinge on Iran’s nuclear program, particularly the fate of its enriched uranium stockpile. With much of its nuclear infrastructure destroyed, and with the closure of Hormuz already serving as a powerful deterrent for the future, such a compromise appears politically feasible.
The bad news is that the US has indicated it will maintain its naval blockade until it receives a formal proposal from Tehran. In the absence of an agreement—or even a clearly defined negotiating framework—the timeline for resolution remains uncertain, and the tail risk of re-escalation increases with each passing day. In that scenario, Iran’s likely next steps would include targeting UAE energy infrastructure (Saudi facilities appear relatively insulated, given Pakistan’s role as mediator and its troop deployment to the Kingdom) and stepping up Houthi-led disruptions to Red Sea shipping. Taken together, these measures could remove up to a further six million barrels per day from global supply.
Week 8 assessment
| Positive (earlier normalization of energy flows) | Negative (prolonged disruption to energy supply) |
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Macroeconomic impact
Using IMF World Economic Outlook forecasts, we attempt to map how economic damage compounds over time (Figure 1). The impact by month 3 is significantly greater than in month 1, reflecting the transition from initial price shocks to genuine supply disruption.
The refined fuels space is already clearly more acute. Europe has warned of potential jet fuel rationing, and airlines have begun cancelling flights. However, the key region to watch is Asia, where dependence on physical energy deliveries from the Middle East is highest (Figure 2).
Early signs of inflation pass-through are now emerging, with the Philippines the first EM central bank to tighten policy. Further rate hikes across EM appear likely, though there remains a case for DM central banks to look through near-term inflation toward the eventual growth slowdown—and accompanying disinflationary forces—and stay on hold. It is at this juncture that scenario outcomes and policy responses diverge most materially.
Markets
The initial risk-on rally following the ceasefire was justified, as it removed the tail risk of a far more severe destruction of energy production. Strong US earnings and resilient macro data provided further impetus to the ever-present buy-the-dip reflex. Our concern is that extrapolating this dynamic to global risk assets may be excessive.
A likely channel is mechanical: a sharp S&P 500 recovery drives lower VIX, eases portfolio risk constraints, and pushes flows into other assets. Equity markets in Hormuz-dependent economies are priced as though energy inventory drawdowns alone will be enough to absorb the shock (Figure 3).
In contrast, long-term bond yields have reacted little to the ceasefire news. As discussed above, the range of growth and inflation scenarios remains wide, raising the prospect of significant bond market moves in the coming weeks as a dominant path emerges. FX markets face a similarly wide range of two-way outcomes, particularly Asian currencies, given their energy dependence and structural undervaluation versus the US dollar.
Bottom line
Re-escalation of war is still possible, but the core risk is an elongated diplomatic process where energy flows remain blocked. Risk assets globally do not seem priced according to the probabilities of sustained disruption and mounting economic costs in energy-sensitive regions and sectors.
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