Middle East escalation and market implications

Recent events in the Middle East mark a significant geopolitical escalation. Under “Operation Epic Fury”, US and Israeli forces launched coordinated strikes on Iranian military infrastructure targeting air defence systems, missile and drone launch sites, naval assets and senior leadership. Iran’s supreme leader, Ali Khamenei, died in the attack, along with many senior military leaders. Iran’s military capability now appears materially weakened, although retaliation continues, including missile and drone attacks on energy and civilian sites in Bahrain, Saudi Arabia, Qatar, Iraq and the United Arab Emirates (UAE).

Higher energy prices

Roughly 20% of global oil and natural gas flows through the Strait of Hormuz. Shipping traffic has stalled, more than 150 tankers have reportedly dropped anchor, and at least one vessel was attacked. Although a heavy US naval presence could ultimately restore flows, near-term disruption risk remains elevated. Oil has spiked to above US$80 a barrel. Sell-side analysts forecast a range between US$80 and US$110, should tensions and closures persist. Natural gas prices have also spiked by around 70% on supply disruptions. Energy prices will only normalise once energy is allowed to flow freely and any risk of sabotage and infrastructure attacks disappears.

Graphic 1: Energy prices rose sharply as shown in the graphs below: natural gas (top) and oil (bottom)

Source: Bloomberg as at 4 March 2026.

Most of the energy flowing out of the region and Strait of Hormuz is destined for China, India, Japan and the rest of Asia. The US, the world’s largest oil producer, has been a net exporter of oil since 2019 and will be relatively less exposed to oil disruptions.

Higher inflation and fewer rate cuts

Lower energy prices have been a key contributor to recent global disinflation. Higher oil prices may reverse part of that progress. If the oil price remains high for a prolonged period, it may prevent central banks from cutting rates. The market has already pulled back potential rate cuts from the US Federal Reserve (Fed) and the South African Reserve Bank (SARB). We now don’t expect the SARB to cut rates at the next meeting on 26 March.

Given that fuel is typically a larger contributor to the consumption basket of emerging markets (EM) relative to developed markets (DM), we see EM being hardest hit by higher oil prices and the repricing of interest rate expectations. Many EM countries are large oil consumer markets and may face disproportionate market pressures.

Stronger US dollar

The US dollar will likely strengthen while the conflict lasts, unlike other recent risk-off events when the US dollar weakened. While the US dollar remains overvalued and fundamentals suggest structural depreciation over the coming year, the short-term cyclical pressure calls for a stronger US dollar.

• Higher oil prices and trade flow disruptions will weigh on global growth. Economic growth of open economies and large oil demand will be hit disproportionately harder than the US, which is a relatively closed economy and self-sufficient oil consumer.
• Relative to other core markets, the US Fed was expected to cut the most. With those cuts now being priced out, the US dollar will benefit most.
• US assets have underperformed this year but outperformed during the recent conflict. Investors still see the US as a relatively safe haven during times of global risk-off.

Unless this conflict is prolonged, leading to sustained higher inflation and potential rate hikes, we see the longer-term path for the US dollar to weaken.

Market reaction

The initial market reaction was fairly contained, but risk assets sold off heavily more recently as expectations of a short-lasting conflict faded. While equity markets globally fell, emerging market assets have been hit the hardest. South African equities initially reacted defensively, but the drop in gold and PGMs weighed on the local market.

The rand also came under pressure along with other emerging market currencies. While the US dollar has acted as a safe-haven, US Treasuries have not. Yield rose as the market priced in potentially higher inflation and real rates.   

Commodities have struggled in the face of a stronger US dollar, growth concerns and investor repositioning. Gold often acts as a safe-haven asset during geopolitical uncertainty. Up to now, it has failed to do so. We believe investors have taken profit from the sharp rally seen year to date to raise cash. Other precious metals like platinum and palladium suffered the same fate, but in addition, also face risks of a potential global slowdown. In our view, the positive gold and PGM fundamentals will reassert themselves once the severe risk selling has subsided.

This should support the broader SA equity market and provide a margin of safety to investors. Rand-hedge names will benefit from the weaker rand and provide some offset, while local bank and retail exposure may remain under pressure along with the rand. We believe the longer-term constructive thesis for local assets holds. 

The big question for the market is, how long will the conflict last?

Outlook on conflict

In our view, the conflict is more likely to last weeks rather than months, and we expect financial markets to normalise once the immediate uncertainty fades. Our view is informed by several factors:

• President Trump’s stated objectives include degrading Iran’s military capability, preventing the development of nuclear weapons, and weakening the current Iranian regime. He can arguably claim partial success on all three fronts. However, Israel and the US remain engaged while Iran continues to retaliate, suggesting that Iran still retains some military capability. A few additional targeted operations may be required to further weaken Iran’s military capacity and resolve.
• A new supreme leader has not yet been appointed. The situation will begin stabilising only once new leadership is in place and recognised by the US. Washington has signalled that it remains open to talks with Iran. The question is whether new leaders will adopt a more pragmatic stance.
• Iran’s military and political leadership have been significantly weakened, while the country faces rising domestic discontent and economic strain. Under these pressures, the regime may be forced to accept a negotiated settlement to ensure its survival.
• Domestic political constraints in the US are likely to limit the appetite for a prolonged conflict involving ground forces. Historically, extended wars tend to weigh on presidential approval ratings.
• Regional allies have urged the US to keep the conflict short. The perception of the Gulf States as safe and stable has already been undermined by Iran’s attacks on civilian infrastructure, increasing pressure for a swift resolution.
• President Trump has shown in the past that he is sensitive to equity markets and ready to shift stance when equity markets disapprove of his policy. Should equities fall 10%, we think a different approach may be taken.