Into the wild

As we write this morning, the conflict with Iran is clearly intensifying and financial markets are reacting accordingly. Brent crude has surged above USD 110 per barrel, Japanese equities are sharply lower with the Nikkei down around 7%, and both European and US futures are deeply in the red. In other words, markets are no longer treating this as just another geopolitical headline. They are starting to price the risk of a more prolonged conflict and, above all, a more persistent energy shock.

This does not change our broader analytical framework, but it does reinforce it. As we wrote in previous notes, wars and geopolitical crises do not automatically derail equity markets over the long run. The critical transmission channel is energy. That was true during the Yom Kippur war and it remains true today. What matters is not so much the political symbolism of the latest developments in Tehran, but whether this conflict materially disrupts oil flows for long enough to create a genuine inflation shock.

That risk has now increased. Higher oil prices are already feeding into inflation expectations, and the second-round effects may not stop at the pump. Fertilizer prices are moving up sharply as well, which raises the prospect of renewed food inflation in the months ahead. This is precisely the kind of late-cycle supply shock central banks do not want to see: weaker growth, but stickier inflation. In short, the stagflationary risk is no longer theoretical.

What is striking is that this is happening just as the US economy was already showing signs of fragility. The latest US employment data came in materially weaker than expected, which under normal circumstances would have supported the case for easier monetary policy. Instead, markets are focusing on the inflationary consequences of war. That makes the policy outlook more complicated and explains why risk assets are under pressure globally this morning.

Our conclusion nevertheless remains broadly unchanged for now. We do not think investors should automatically extrapolate today’s panic into a lasting destruction of value across productive assets. Markets often behave like emotional voting machines in the short run. But we do acknowledge that the probability of a longer conflict, and therefore of a more durable oil shock, has risen. This is the variable that needs to be watched most closely in the coming days.

At ECP, we continue to monitor the situation very carefully and will adapt if the facts change. For the moment, discipline, selectivity and a focus on resilient productive assets remain the right compass.