Chris Iggo, Chair of the Investment Institute and CIO for AXA IM Core, BNP Paribas Asset Management
The US and Israel have taken decisive military action against Iran in what appears to be a bid for regime change. The initial market response has seen higher oil prices, a slightly stronger dollar, lower equity markets, and wider credit spreads. The extent to which these market moves are sustained depends on how the conflict unfolds from here.
The US and Israel have taken coordinated military action against Iran, with operations targeting several Iranian cities.
The intention appears to be to facilitate regime change and eliminate any ability Iran had to develop nuclear weapons, but the extent, and speed, at which these can be executed is uncertain.1 The duration of the conflict depends on several factors including the extent of damage done to Iran and its ability to respond to the attacks and control any domestic uprising.
The military operation was long and very detailed in the planning, according to press reports.2 Iran’s top government leadership was eliminated.3 While a ground war looks unlikely at this stage, numerous questions remain such as whether domestic opposition is organised enough to deliver a credible alternative government. Any sign of fractured opposition would suggest a prolonged period of unrest.
Market and macroeconomic reaction
The oil market is the key benchmark in this situation. Brent crude, as of 2 March, traded at some $78.65 a barrel, up from $72.87 on 27 February and its end-2025 level of $59.87.4
Other energy prices are also higher with European natural gas prices having risen. The obvious risk is that higher wholesale energy prices are passed through to broader inflation indices. In 2023, the US Federal Reserve calculated that a 10% permanent increase in oil prices would raise the overall US Consumer Price Index by around 0.4% after two quarters.5
The impact on different economies will depend on the level of energy intensity and the extent to which oil is produced domestically or imported. However, oil consumption is at a record high – and the effective closure of the Strait of Hormuz would disrupt the oil trade.
According to the US Energy Information Administration, around 20 million barrels of oil per day pass through the Strait with a further 11.5 billion cubic feet of liquefied natural gas. In terms of destination, the countries that receive the largest volume of oil shipped through the Strait include China, India, South Korea, Japan and other Asian economies, followed by Europe and the US.
So far, there has been little impact on inflation-linked bond markets. Clearly, the longer oil prices remain elevated, the bigger the potential impact on inflation expectations. This could also potentially impact monetary policy.
However, there has been little impact so far on US interest rate expectations. Forward markets still price in three rate cuts from the Fed this year. From a growth perspective, any prolonged period of conflict will likely have a negative effect on the global economy. Government bond yields have risen, which may reflect the initial concerns over inflation.
Market outlook
Market sentiment will be largely driven by the potential size and duration of the conflict; the reaction of global superpowers to US-led action; and energy price rises.
At the margin, there will be a negative impact on equity earnings expectations. Sectors likely to be potentially most impacted include airlines, hotels and hospitality, and businesses with direct exposure to the region. Equity market sentiment was already fragile over recent weeks due to concerns over capital expenditure levels around artificial intelligence.
For bond markets, the drivers will continue to be the growth and inflation outlook. A prolonged energy shock will be negative for growth eventually, which may lead to longer-term interest rate expectations coming down, but inflation break-evens may rise over the intermediate period.
Bonds may also benefit from ‘safe haven’ buying, although this is not evident so far with yields in all the major markets higher at the time of writing.
In credit markets, some indices have moved higher, and individual issuers will likely be impacted. Sectors at risk include specific Middle East issuers, regional banks, and regional sovereign issuers.
Ultimately, the market and macro impact will be determined by the duration and level of escalation of the conflict. At the core is whether the remaining leadership in Iran can withstand the US-led ambition of regime change. The additional unknown is how Washington’s strategy will evolve. For now, markets are in risk-off mode as there are so many uncertainties about how this conflict will evolve.
[1] Why did US and Israel attack Iran and how long could the war last? – BBC News / US-Israel strikes on Iran: February/March 2026 – House of Commons Library
[2] The eight-month build-up to Trump’s attack on Iran
[3] Why did US and Israel attack Iran and how long could the war last? – BBC News
[4] Bloomberg 2 March 2026
[5] The Fed – Second-Round Effects of Oil Prices on Inflation in the Advanced Foreign Economies
