More pain

The escalation around Iran is pushing geopolitical risk back to the forefront. Markets have responded with weaker equities, higher bond yields and continued oil volatility. Asian equities fell 3.3%, including declines of 3.4% in Japan and 5.9% in Korea, while US Treasury yields rose to 3.94% on the 2-year and 4.41% on the 10-year. European equity futures are down 1.3%. Brent is trading around $113/bbl, up more than 70% year-to-date.

The key question for markets is duration. A prolonged conflict would tighten financial conditions further and keep inflation concerns elevated.

That said, the global economy is significantly less energy-intensive than it was in the 1980s or during the first Gulf War. Efficiency gains and a more diversified energy mix mean that, while volatility may remain elevated, the macro impact of an oil shock should be less severe than in previous decades.