Markets have moved beyond pricing in a ‘swift and intense’ shock and have started discounting a more enduring and chaotic scenario, one in which attacks on infrastructure cast a longer shadow over oil flows, supply chains, and growth well into mid‑2026.

Just as the situation shifted from being merely an oil story to also being an inflation story, a central bank story, and, increasingly, a confidence story, the US president scrapped his ultimatum. Having issued a high‑stakes ultimatum to Tehran, Trump stepped back from it. This climbdown, the moment referred to as “chickening out,” briefly tempered fears but did little to undo the inflationary shock already coursing through energy markets.

Central banks signal tighter policy as oil‑driven inflation rises

Last week’s central bank communication made it clear: the dominant tone is hawkish, with policymakers increasingly forced to react not to theory but to market‑driven oil assumptions. The European Central Bank has been especially open in that respect. The roadblock for risk assets is no longer only the spike in energy prices, but also the prospect that central banks respond to the second‑round inflation effects. The key variable remains the size and duration of the oil surge: talk is hawkish already, but actual rate action still depends on whether the shock proves to be persistent. The Swiss National Bank remains the notable outlier, prioritising CHF strength over strict price stability.

Asset prices, meanwhile, have left investors scratching their heads. Prior to this week’s action, Swiss equities did not behave like safe havens, gold and precious metals sold off, and even long‑dated US Treasuries felt the heat. Only the USD has broadly lived up to its crisis role, though notably less so against emerging market currencies. The simplest explanation is brutal but familiar: in the peak phase of a crisis, investors liquidate what they can, including the assets best suited to hedging the storm.

Markets react to Iran war as oil buffers shrink and supply risks rise

The Iran war is in its fourth week, and the doomsday voices are taking over. Well‑filled storage largely absorbs the supply shock, but this buffer is vanishing. Our base‑case scenario foresees a silver lining to appear this week or next, one that shows ways to revitalise trade through Hormuz. The pressure on politics is high, but this week’s news about a US‑Iran rapprochement confirms the context is open.

Markets remain tensely fixated on the Iran war, oil prices, and how the Middle East’s trade isolation wreaks havoc on global supply chains. With the escalation in its fourth week, nervousness is spreading — a common crisis dynamic. Energy infrastructure is still spared from meaningful damage. The hit on Qatar’s gas export terminal seems digestible once trade through Hormuz revitalises. The reported outage corresponds to a third of the capacity expansion expected for this year. The oil supply disruption has stabilised below 10 million barrels per day, or below 10% of global supplies. The shift to alternative trade routes seems to be more successful than expected, especially regarding Saudi exports via the Red Sea.

Well‑filled oil storage is absorbing the shock so far, but the Iran war brings a supply‑chain adjustment at proportions that have hardly been seen before. This is particularly felt in the fuels markets, where shortages appeared in jet fuels and some Asian emerging economies. This re‑routing, and the uncertainty‑induced risk premium, largely explain the oil price spike. That said, the supply buffer is vanishing.

A silver lining must appear soon — this week or next — showing ways to revitalise trade through Hormuz. Fuel prices have reached the pressure point for politics to act. The common ground is vast, solutions are broadly available, and the US administration has previously shown flexibility to twist the narrative to its own benefit. 

Amid these uncertainties, we continue to use our three scenarios as guides. Recent adjustments include hikes to energy price levels that bring economic damage considering the past years’ inflation and transition trends. 

What should investors do?

While markets recently leaned into our bear‑case scenario, we see an unchanged likelihood of our base case scenario, which in part assumes that this silver lining appears soon. To investors, we say: the fallout of the Iran war is likely to morph into a messy, highly volatile consolidation. After anything carrying risk dropped and then bounced, this is the moment to draft a shopping list — but not necessarily to deploy it yet.