Source: ING THINK
Authors: Carsten Brzeski, Warren Patterson, James Knightley, Lynn Song, Chris Turner, Padhhraic Garvey (CFA), Deepali Bhargava
Compiled and Edited by: BitpushNews
From cautious optimism on Friday to full-scale strikes by the U.S. and Israel on Saturday morning, and the various uncertainties about the future situation, military actions in the Middle East not only have the potential to reshape the regional landscape but could also have significant impacts on the global economy and markets.
Key Points of This Article
-
Two Overall Scenarios for the Markets
-
How to Think About Its Impact on the Global Economy
-
Global Trade: A Supply Shock at the Worst Possible Time
-
United States: A War That Pushes Up Domestic Prices
-
Eurozone: The Most Vulnerable Major Economy
-
Asia: Inflation and Trade Balances May Come Under Pressure
-
What These Two Scenarios Mean for Financial Markets and the Global Economy
-
Comparing Current Energy Supply Risks with 2022
Main Text Below:
Coordinated strikes targeting Iranian military, nuclear facilities, and leadership bases, including the reported death of Iran's Supreme Leader Khamenei, have delivered a profound shock to the Iranian political system and fundamentally shattered the diplomatic process that seemed to be progressing just days ago. Previously, the third round of nuclear talks had just concluded in Geneva, with Omani mediators reporting "significant progress." But Washington clearly did not share this view.
The official U.S. objectives have gone far beyond nuclear containment. U.S. President Donald Trump's direct address to the Iranian people – "seize your government, it will be in your control" – coupled with Israeli Prime Minister Benjamin Netanyahu's statement about "eliminating an existential threat," makes regime change an explicit goal. This is a major, legally contentious, and historically perilous step. Middle Eastern history offers little evidence to support the assumption that once the leadership structure collapses, the civilian population can take control of order. Power vacuums often lead to civil war, hardliners consolidating power, or prolonged fragmentation; sometimes all three simultaneously.
Unlike the strikes against Iran last summer, Tehran did not wait long to respond this time. Retaliating within four hours, attacking Israel, U.S. bases in Bahrain, Kuwait, and Qatar, as well as civilian infrastructure across the Persian Gulf, indicates that contingency plans were already prepared.
Undoubtedly, this remains a rapidly evolving environment. From a market perspective, it could evolve into two rather abstract overall scenarios.
Two Overall Scenarios for the Markets
For now, the possible military and geopolitical scenarios are numerous and seem to change daily. For financial markets, the divergence point is both simple and brutal: will this end within a few days, or will it evolve into an "eternal war" involving the entire region?
Scenario 1:
Four to seven days, followed by a period of uncertainty within Iran. U.S. and Israeli strikes quickly deplete fixed military targets, the pace of operations slows, and a de facto ceasefire emerges within a week. Iran's retaliatory actions are constrained, destructive enough to have internal political utility but insufficient to provoke a decisive U.S. counter-escalation. Harassment occurs in the Strait of Hormuz but without serious disruption, partly because Tehran's own oil exports depend on it. The regime either survives in a weakened state or descends into a chaotic internal transition.
For markets, this is the June 2025 script: an initial oil price spike, but the gains fade as fears of a Strait of Hormuz disruption ease. This is just a temporary war premium with no lasting macro impact.
Scenario 2:
Iran's retaliation forces Trump's hand – The Eternal War. President Trump indicated on Sunday evening that the war could last up to four or five weeks. Iran's retaliatory actions have already spread to 10 countries, suggesting no near-term easing. In this more severe scenario, strikes expand from fixed military targets to infrastructure and mobile assets, the operational pace slows but the timeline extends indefinitely. With its regime's survival threatened, Iran initiates asymmetric economic warfare, including sustained harassment of tanker traffic, activating Houthi attacks on Red Sea shipping, and attempting to disrupt navigation through the Strait of Hormuz.
Even a partial disruption of this chokepoint, which handles 20 million barrels of oil and over 100 billion cubic meters (bcm) of liquefied natural gas (LNG) daily, would constitute a historic supply shock. The entire region would become unstable. Market impacts would be vastly different: oil prices march towards $100 and beyond, a real correction in equities, sustained flows into bond markets, long-term disruption to global supply chains, and central banks trapped in a dilemma with no clear answers.
How to Think About Its Impact on the Global Economy
Global Trade: A Supply Shock at the Worst Possible Time. The Iran war occurs at a time when the global trading system is already under pressure from Trump's tariff offensive and supply chain fragmentation since the COVID-19 pandemic and the Ukraine war. The Strait of Hormuz, the most critical chokepoint for global energy trade, is now in an active war zone.
Even without a formal blockade, commercial consequences are already apparent: insurers are canceling coverage, shipping premiums are soaring, vessels are rerouting or pausing voyages. The ripple effects extend far beyond energy. Airspace closures in the Gulf are disrupting air corridors between Europe and Asia. If Houthi activity in the Red Sea reignites, it would close the alternative route previously used to maintain cargo flow during tensions in the Strait of Hormuz.
In a prolonged conflict, rising energy costs, logistics disruptions, and a general confidence shock would combine to pose a significant drag on global trade volumes, at a time when the world economy is already digesting the inflationary and growth consequences of the tariff shock. This is truly the worst possible timing.
United States: A War That Pushes Up Domestic Prices. For the United States, despite limited direct trade exposure to the Strait of Hormuz, rising global oil prices will exacerbate the current "cost of living crisis." U.S. consumers are already stretched thin, and with the midterm election cycle approaching, gasoline prices are extremely politically sensitive. Rising oil prices will also complicate the future path of Federal Reserve monetary policy.
Another supply-side inflation shock, on top of the inflationary impact of tariffs not yet dissipated, could make further rate cuts difficult to justify, at least in the near term. Simultaneously, if the conflict drags on and uncertainty suppresses business investment and consumer confidence, the growth outlook will also dim.
The only partially offsetting factor is that the U.S. itself is a major oil producer; rising oil prices benefit the shale industry and improve the domestic energy terms of trade, albeit at the expense of consumers. But this balance is politically difficult to explain and economically insufficient to offset the broader losses.
Eurozone: The Most Vulnerable Major Economy. Europe is the region hit hardest by the macro consequences, and the timing is extremely unfavorable. The eurozone had just emerged from long-term stagnation, showing tentative green shoots of recovery – although recently these have been damaged by new uncertainties around tariffs. Now, the region may face an energy shock on top of the trade shock.
Europe is largely dependent on imported oil and imports a large portion of its LNG. Soaring energy prices or even potential energy supply disruptions could evoke memories of the energy cost crisis from late 2021 to 2023. Compared to then, there are two important differences: Europe no longer needs to "de-risk" from a single major energy provider; and this oil price crisis is occurring at the end of winter, not the beginning.
The European Central Bank (ECB) is in a real dilemma. Services inflation remains stubborn, an oil price shock will push up headline inflation – yet the growth outlook is deteriorating under the combined pressure of tariffs, uncertainty, and now energy costs. A December ECB analysis showed that a 14% rise in oil prices would increase inflation by 0.5 percentage points and potentially reduce GDP growth by 0.1 percentage points. However, this is just the price effect and does not include the impact of supply chain disruptions. Given the recent memory of surging inflation, the ECB is unlikely to dismiss any new inflation spike caused by oil prices as transitory or even deflationary. However, for rate hikes to be seen, the eurozone economy would need to show clear resilience.
Asia: Inflation and Trade Balances May Come Under Pressure. Currently, thanks to a low starting point with generally controlled inflation, Asia seems able to digest a oil price jump. However, the severity and persistence of the price increase will ultimately determine its impact. If prices remain high, Asia is particularly vulnerable to oil price volatility due to its heavy import dependence; aside from Australia, Malaysia, and Indonesia, all other economies run deficits in their oil and gas trade, making them extremely fragile when energy costs rise. If prices remain elevated, three factors will determine the impact:
-
High Reliance on Middle Eastern Oil: A large portion of Asia's crude supply comes from the Persian Gulf. Japan and the Philippines rely on the region for nearly 90% of their oil needs, while China and India import about 38% and 46% respectively. Any disruption to the Strait of Hormuz – this critical waterway – would limit supply, potentially causing shortages, slowing business activity, and putting pressure on Asian manufacturing.
-
Trade Balances Under Pressure: Even without physical supply disruptions, rising global oil prices would worsen trade balances and increase inflationary pressures. Thailand, South Korea, Vietnam, Taiwan, and the Philippines are most vulnerable. A mere 10% rise in oil prices could worsen current account balances by 40-60 basis points. Sustained price increases would only deepen these deficits.
-
Strong Inflation Pass-Through: As energy holds a relatively high weight in the consumer inflation baskets of many emerging Asian economies, oil price increases quickly feed into overall inflation. On average, a 10% rise in oil prices increases CPI inflation by about 0.2 percentage points.
Our baseline expectation is that headline inflation will rise somewhat across most of Asia in 2026 but remain within the target ranges of most central banks. But a price shock of this magnitude – if sustained – could push inflation above target ranges and increase pressure on central banks to tighten policy in the near term.
What These Two Scenarios Mean for Financial Markets and the Global Economy
In Scenario 1, the macro narrative is just noise. A temporary oil price spike, some safe-haven positioning adjustments, then a return to the established agenda of tariffs, growth differentials, and AI themes.
In Scenario 2, the main transmission channels are oil, uncertainty, and the resulting central bank policy dilemma. In this scenario, oil prices could surge towards $100-140. For European gas, TTF prices could spike to €80-100/MWh if the LNG market begins to price in a prolonged loss of Qatari supply. Sustained high oil prices could severely delay monetary policy easing. Although oil shocks are theoretically deflationary in some models, the recent inflation experience will prevent most central banks from responding to a new oil shock with monetary policy easing.
The initial safe-haven reaction is very clear. Treasury and Bund yields would fall, gold would rise, as we saw this morning and on Friday (when markets began anticipating military action). If oil prices remain high and inflation reaccelerates, the safe-haven rally would fade.
In terms of exchange rates, investors would relive the March 2022 script: U.S. energy independence at that time led the dollar to rally sharply against fossil fuel import currencies like the euro and Asian currencies. The Fed's trade-weighted dollar index rose over 10% in six months, while crude prices stayed high for a quarter and European gas prices remained elevated for nearly six months.
Expect the euro and yen to come under sustained pressure from a prolonged crude price surge, and we could also see unusually sharp reversals in emerging market (EM) currencies involved in carry trades. In Europe, this would make the Hungarian forint one of the most vulnerable currencies; markets will also watch closely whether Turkish policymakers can control capital outflows from crowded lira carry trades. In short, this year's benign cycle of flows from the dollar to emerging markets could reverse and turn vicious.
Comparing Current Energy Supply Risks with 2022
For oil and gas markets, comparisons with 2022 and the Russian invasion of Ukraine are likely. The volume of oil supply at risk from a complete blockade of the Strait of Hormuz is about 15-20% of global supply, depending on how much Saudi Arabia can divert via the Red Sea pipeline. This is significantly higher than the 7-8 million barrels per day (about 7-8% of global supply) of Russian oil supply at risk in the initial phase of the Russia-Ukraine war, when Brent crude prices briefly soared close to $140/barrel.
However, what provides some buffer now is that oil inventory levels are more comfortable than before the invasion of Ukraine. OECD inventories are currently about 200 million barrels higher than pre-invasion levels. But even so, a full two-week blockade would essentially erase this buffer, putting enormous upward pressure on prices.
For natural gas, up to 125 bcm of LNG flow is at risk, representing about 3% of global gas consumption but 22% of global LNG trade. However, about 15 bcm of LNG exports from Oman are less at risk, as their vessels do not need to transit the Strait of Hormuz, but are still near the danger zone.
Before the Russian invasion of Ukraine, nearly 160 bcm of Russian gas (via pipeline and LNG to the EU) was at risk. Thanks to LNG export capacity build-out (primarily from the U.S.), the market is in a relatively better position now. Since early 2025, we have seen about 40 bcm of U.S. capacity come online, with another 14 bcm added this year and more capacity to be released in the coming years. However, for now, the new capacity is far from sufficient to compensate for the potential loss of Persian Gulf supply.
Market tightening would lead to fiercer competition for spot LNG between Asia and Europe, pushing up prices. Price-sensitive buyers in Asia might withdraw from the market, and Europe might not repeat the 2022 scenario – frantically buying at any cost.
Twitter:https://twitter.com/BitpushNewsCN
Bitpush TG Discussion Group:https://t.me/BitPushCommunity
Bitpush TG Subscription: https://t.me/bitpush
