Iran Conflict Stokes Stagflation Fears, Halts Rate-Cut Momentum

The Middle East conflict has become the dominant macro shock reshaping market expectations. The Iran war has effectively closed key export routes through the Strait of Hormuz, with Iran's Kharg Island oil jetties repeatedly empty and Saudi production at its lowest since 1990. Global oil inventories are falling at the fastest pace on record, according to the IEA, and the disruption is expected to persist for months as hostilities drag on. This energy shock is reverberating across asset classes and regional economies in ways that complicate the investment narrative central banks had been building around eventual rate cuts.

Central banks worldwide are now signaling caution or reversing dovish pivot expectations. The ECB explicitly warned of stagflation risk; Czech policymakers noted that monetary policy remains restrictive despite inflationThe rate at which prices rise across an economy. jumps; India's RBI governor flagged the possibility of fuel price increases if oil stays elevated; and Japan's 20-year bond yield hit a 1997 high as inflation pressures mount. The energy price shock is hitting energy importers hardest: India is stockpiling fuel and considering price hikes; Turkey suffered record currency reserve outflows in March; and France's unemployment jumped above 8% for the first time in five years, signaling economic weakness amid cost pressures. The Philippines is pricing in 50-basis-point rate hike odds, the largest since 2023.

Equity markets face a margin squeeze. Consumer and cyclical sectors are vulnerable to both higher energy costs and delayed rate cuts. Tech, which had priced in a rapid easing cycle to support valuations, has rotated lower as inflationThe rate at which prices rise across an economy. data (notably US CPI beating estimates mid-week) reset the terminal rate higher. Gold has softened despite the energy shock because rate cut odds declined. The dollar has strengthened as US yields hold firm, pressuring emerging markets already fragile from capital outflows tied to the geopolitical shock. Copper is climbing toward record highs as supply risks mount, but other commodities are under pressure from demand destruction fears.

The debate centers on whether stagflation will actually materialize or whether global growth is resilient enough to absorb the energy shock. Bullish voices point to strong corporate earnings and tight labour markets supporting nominal growth, while sceptics warn that sticky inflationThe rate at which prices rise across an economy. plus slower growth is already appearing in leading indicators like French unemployment. Goldman Sachs sees dollar strength and elevated yields persisting, a headwind for risk assets.