Iran conflict: Geopolitics drives volatility – the real risk lies in inflation and interest rates

Politically, the Iran conflict is perceived as an escalation. For financial markets, however, it is primarily an energy, inflation and interest rate event. The Strait of Hormuz is the key factor: a significant share of global oil flows as well as substantial LNG volumes pass through this narrow chokepoint. If this maritime route were disrupted for an extended period, the result would not only be a spike in oil prices but potentially also a gas or LNG shock. The latter, in particular, is often the more sensitive driver of inflation expectations and long-term yields in Europe.

At present, however, military developments point more toward a limited escalation. The US and Israel appear to have prepared their strikes for months, targeting numerous military assets and missile launch facilities. This likely significantly constrains Iran’s short-term ability to escalate. At the same time, China and Russia have so far responded mainly with rhetorical criticism rather than concrete countermeasures. For example, no UN Security Council resolution has been passed and weapons deliveries to Iran also appear unlikely. This, too, argues against an immediate widening of the conflict.

For investors, the key question is therefore less “risk off or risk on?” and more whether a second-round effect could emerge that forces central banks to maintain restrictive policies for longer. In the first trading days since the outbreak of the conflict, risk premia in corporate bonds have risen, but there has been no sign of a systemic credit panic so far. This fits a common pattern: geopolitics creates volatility, but sustained pressure on interest rates and spreads tends to emerge through inflation and liquidity.

An often underestimated stabilising factor is China. Beijing is not only a political actor but also a major energy importer and the dominant buyer of Iranian seaborne oil exports. This gives China considerable economic leverage without the need for military escalation. Its strong interest in keeping trade routes open suggests that pressure may be applied behind the scenes to prevent a prolonged blockade of the Strait of Hormuz.

In this context, the reaction of the oil market is also noteworthy. The so far moderate price increase toward around USD 85 per barrel indicates that investors currently expect only a temporary disruption of transport routes. Global strategic oil reserves also provide an additional stabilising factor. However, if the reopening of these routes were to be delayed, temporary spikes toward USD 100 per barrel cannot be ruled out.

Inflation, however, is likely to remain a key risk factor irrespective of the Iran conflict, operating on a structural and global level. In the US in particular, we currently see a marked increase in producer prices and core inflation. A prolonged rise in oil and gas prices as a result of the crisis would further reinforce this upward pressure, with corresponding implications for interest rates and economic growth.

The indicators investors should monitor now include war risk premia in shipping insurance, the development of LNG flows and credit early-warning indicators such as the iTraxx index. If these signals stabilise, the base case remains intact: higher volatility but no lasting market dislocation.