Fin-X Rapid Response - March 13th

Recent military strikes by the US and Israel against Iran have escalated into a broader geopolitical and economic confrontation centred on energy markets. Iran’s attempts to disrupt shipping through the Strait of Hormuz have contributed to a sharp rise in global oil and gas prices and increased uncertainty around the security of energy supply.

This report outlines the implications of the disruption for the global economy, inflation, and financial markets, with particular attention to the consequences for Australia. It reviews the emerging policy response from governments and central banks, the impact on bond yields, and the potential effects on asset prices.

The Conflict So Far

The United States and Israel launched combined military strikes against targets in Iran a little over two weeks ago. The ultimate strategic objective remains unclear, and there is a meaningful risk that the two nations' aims may diverge.

President Trump has said the conflict could be over soon, though that outcome appears unlikely in the near term. The caution expressed by US Marine Corps General James Mattis — later Secretary of Defense — remains pertinent:

"No war is over until the enemy says it's over… the enemy gets a vote."

Iran is showing no signs of backing down. It appears instead to be pursuing an indirect strategy: inflicting economic pain on the US administration to generate domestic political pressure on the President ahead of November's midterm elections, and applying further pressure through regional allies.

To that end, Iran is attempting to blockade the Strait of Hormuz, disrupting the passage of approximately 20% of global crude oil supply.

The US has sought to reopen the strait by offering insurance coverage and arranging naval escorts, but shipping operators remain, understandably, reluctant to place crews at risk.

Iran is further disrupting energy supply by bombarding infrastructure assets in neighbouring Gulf states. Strikes are also impeding regional air traffic — including routes between Australia and Europe — with effects spilling over into tourism and commerce.

Since the start of the year, Brent crude has risen +67% in US dollar terms. ICE Natural Gas has risen by more than +77%.

The International Energy Agency (IEA) has announced plans to release 400 million barrels of strategic reserves — more than double the 182 million barrels released following Russia's invasion of Ukraine. Contributions include 172 million barrels from the US Strategic Petroleum Reserve, 80 million from Japan, 22.5 million from South Korea, 13.5 million from the UK, and additional amounts from other IEA members. Non-IEA members, including China and India, are also expected to make domestic releases.

Nevertheless, 400 million barrels represents approximately 20 days of lost supply at current disruption levels, and the announcement has so far failed to bring prices down.

The volume of available supply going forward remains highly uncertain and will depend on both the severity and the duration of the disruption.

Scenarios in which a ceasefire is agreed and its effects unwind remain conceivable. Still, we currently attach a relatively low probability to this outcome given the absence of conciliatory language from Iranian representatives. In his first published statement since succeeding his father as Supreme Leader, Mojtaba Khamenei vowed to keep the Strait closed and to open new fronts if necessary.

Global Economic Impact

From a purely economic perspective, the blockade constitutes a severe energy supply shock. Energy, alongside capital and labour, is a universal input. But the price rise is felt most acutely in the transportation and mining sectors.

Rising gas prices fall primarily on power generation and fertiliser manufacturing, which is an important input in food supply.

Energy consumption tends to be inelastic in the short term. A sharp rise in energy costs, therefore, creates margin pressure across all sectors, passing through to prices and pushing inflation higher. Over time, the increased cost burden on consumers can curtail discretionary spending and precipitate a growth shock of varying severity.

Energy importers, notably in Europe and Asia, are likely to be the most exposed, while exporters stand to benefit. The eurozone and the UK have so far seen the most pronounced spike in market breakeven inflation expectations.

In Australia, a net importer, the inflationary impulse is also likely to be felt, and if sufficiently persistent, could evolve into a growth shock. As was observed during the pandemic, however, cancelled travel can generate a build-up of household savings where income streams remain intact.

An often underappreciated consequence of an oil price shock is the increased demand for US dollars to pay higher import costs, which withdraws liquidity from global financial markets. There is an additional risk that Iranian strikes on neighbouring Gulf states could slow the flow of petrodollars into US capital markets.

Policy Responses

The fiscal response to date has centred on the potential suspension of duties on energy commodities — the UK, for example, is actively considering such measures.

Australia has announced plans to lower the acceptable quality thresholds for petroleum products in order to broaden available supply. The federal government has also directed the Australian Competition and Consumer Commission (ACCC) to monitor petrol retailers closely for price gouging linked to the conflict and to clamp down on excessive retail margins relative to wholesale costs.

Of greater significance for financial markets is the shift in central bank tone. Seven G10 central banks are due to meet next week. Few were previously expected to move on rates, but market pricing has now swung from pricing prospective cuts to anticipating rate rises in the eurozone, the UK, and Sweden. Switzerland alone is expected to continue on a lower path.

The Reserve Bank of Australia raised the cash rate by a quarter point in February and assesses that the economy may be operating above potential. Deputy Governor Andrew Hauser described the Iran conflict and the associated oil price shock as an upside risk to inflation, characterising further price pressures from the Middle East as “not a helpful development” for the RBA’s policy deliberations next week.

Mr Hauser indicated that headline inflation is likely to run higher than the February forecasts, stressing that elevated energy prices compound already-firm domestic inflationary pressures.

Following those remarks, markets are pricing approximately a two-thirds probability of a rate increase to 4.1% at Tuesday's meeting.

The cash rate is nevertheless priced to peak at around 4.5% in August — suggesting the market assigns a meaningful probability that the price shock will prove temporary, and that the economy may subsequently cool, warranting a more accommodative policy stance.

Bond Yields

The RBA is currently the most hawkish among the G10 central banks. As a result, Australian 10-year government yields are testing the highs last reached in 2023. If market pricing on the cash rate proves correct, the term premium embedded in government bonds remains attractive.

Globally, short and long-term yields are trading close to their 2026 highs, but have not shown material signs of breaking into a higher range. This reflects, in part, the comparative restraint of the RBA's post-pandemic rate tightening cycle and, in part, the absence of a clearly positive output gap in other economies.

Potential Impacts on Asset Prices

Despite the rise in yields, the impact on fixed income index returns in 2026 is considerably more contained than during the 2022 episode that followed Russia's invasion of Ukraine. The principal reason is that rate levels are already substantially higher. The price sensitivity of bonds to yield movements (duration) is accordingly lower. The Bloomberg AusBond 0+ Composite index is down just -0.4% in 2026, while the Bloomberg Global Aggregate Bond index is up +0.1% on an AUD-hedged basis.

On broader asset pricing, Stanley Druckenmiller is well known for using the annual change in the oil price, the US dollar exchange rate, and the 10-year US Treasury yield as a combined macroeconomic early-warning indicator, having found that earnings fall sharply when all three exceed certain thresholds simultaneously. It is not clear that those thresholds have yet been breached, as the US dollar has not yet risen materially. But earnings risk appears skewed to the downside.

The impact is likely to be felt more directly among smaller and higher-risk companies, where earnings are more closely correlated with financing costs. Underperformance among global small-caps and widening high-yield credit spreads would not be surprising.

The more significant risk may lie in elevated equity multiples. Valuations can be compressed rapidly as risk aversion rises and discount rates increase, weighing on the intrinsic value of growth assets. The Iran conflict compounds pre-existing concerns around the disruptive impact of artificial intelligence and issues in private credit. Should market liquidity begin to deteriorate, equity indices entering a corrective phase would not be unexpected. We suggest that investors should exercise greater caution with respect to valuations at present levels.

Source: Bloomberg, 13th March 2026

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