As the duration of the Iran conflict becomes increasingly uncertain, investors are turning to the playbook from the "Russia-Ukraine conflict" for guidance on market direction.
Many traders are revisiting trading strategies employed after the outbreak of the Russia-Ukraine conflict in 2022, betting that this week's surge in energy prices will drive inflation higher, consequently triggering sustained US dollar strength and weakness in bonds and stocks. While markets largely dismissed the 12-day US and Israeli strikes on Iran last year, investors are concerned that the current conflict could persist for a longer period.
The unpredictability of the conflict means sentiment can shift rapidly, and some analysts suggest it's premature to assume a shock on the scale of 2022. Reports on Wednesday that Iranian officials had contacted the US Central Intelligence Agency proposing talks provided some relief to stock markets and halted the dollar's advance. Oil prices pared some of their gains.
Market reactions since the onset of the Middle East conflict notably echo those seen in the days following the outbreak of the Russia-Ukraine war. Brent crude has jumped above $82 a barrel, and natural gas has surged to its highest level since 2023. A global equity gauge has fallen 2%, with South Korea's Kospi index experiencing its largest-ever drop. US Treasuries declined due to concerns that inflation would constrain the Federal Reserve's ability to cut interest rates, alongside the traditional safe-haven status of US debt. The US dollar strengthened against all major currencies.
The primary concern for markets is that Middle East turmoil will transmit an inflationary shock globally, similar to the situation in 2022 when the Russia-Ukraine conflict disrupted supply chains and forced government spending to protect industries and consumers. EU governments alone committed over €500 billion ($582 billion), financed by borrowing.
Back then, a broad measure of dollar strength rose 6% between February 24 and year-end. Inflation worries drove the two-year US Treasury yield up by more than 2.8 percentage points over the same period, while the 10-year yield rose by 1.9 percentage points. Gold fell, and the S&P 500 dropped 19% that year—its worst decline since the 2008 financial crisis.
Although European natural gas prices have surged by up to 85% since Friday, they remain well below the peaks set in 2022. However, Europe may face higher risks this time because, with Russian energy still constrained, any incremental supply loss could have significant inflationary impacts. Strategists at Citigroup suggested a conflict lasting more than two weeks could push gas prices from around €55 to €100 per megawatt-hour.
Yields in the UK and Europe rose sharply this week as traders ruled out Bank of England rate cuts and even began pricing in potential European Central Bank hikes. This repricing reflects inflation concerns and the potential for increased borrowing by governments already striving to boost defense spending.
Higher oil and gas prices have dragged the euro below $1.16, its lowest level since November. Options briefly mirrored this pressure, with one-week sentiment on the euro hitting its most bearish level since 2022.
Geopolitical risks are also broadening. While expecting the risks from an Iran war to be more significant, some are still watching the 2022 energy disruption playbook. Previous skirmishes were largely confined to Israel and Iran, but military involvement by the Gulf Cooperation Council could signal a much larger shift in the Middle East's geopolitical landscape.
JPMorgan Chase & Co. also drew comparisons to 2022. Strategists noted that while retail investors showed patience with stocks—avoiding sell-offs for a month after the Ukraine war began—their patience with bonds was shorter. Once it became clear the war would be protracted, triggering a more lasting oil price/inflation shock, retail investors began sustained selling of both stock and bond funds a month later.
Not everyone is sounding the alarm, however. Strategists at Deutsche Bank pointed out that the rise in oil prices does not compare to some of history's larger crises, like 2022 or the Gulf War. Analysts suggested that for the recent energy shock to cause a sustained drop of over 15% in the S&P 500, investors would need to see oil prices surge at least 50% to 100% over several months, alongside broader macroeconomic damage and hawkish responses from central bankers.
Many traders remain cautious nonetheless. For veterans with decades of market experience, caution is warranted, and the Russia-Ukraine conflict remains one of the best guides available to investors. The lesson from 2022 is that investors should not immediately buy the first dip, expecting further declines to come.
