Global Monday Buzz: How global markets are reacting to the ME conflict as it enters its 4th week?
The conflict in the Middle East enters into another week of conflict, with the US threatening to “obliterate” Iran’s power plants yesterday, if it fails to reopen the Strait of Hormuz within 48 hours. These threats come within 3 weeks of volatile Global Oil prices due to the closure of the Strait that controls around 20% of global oil consumption and over 26 million containers of total global trade annually. While the conflict’s implication to the region in terms of its security and threats to human life remains the biggest concern, the Strait’s continuous closure seems to be creating a multitude of economic implication with oil being just the 1st piece of domino to fall.
How have the conflict affected the global stock market?
Since USA’s initial attack on Iran with the “Operation Epic Fury” on 28th February, Brent Oil Futures which were structurally at considerable low levels during 2025 and early 2026, climbed over 50% high as of last week’s closing price. The closure of the Strait of Hormuz has basically taken one fifth of global oil supply out of the system therefore, reducing global oil supply by an estimate of around 20 million barrels a day.
Apart from the direct effects of a decline in oil and gas, which then affects global trade and freight, creating a second wave of various economic complications, future outlook on oil prices and supply along with the overall escalated conflict of the region is also weighing on the decision of global investors. From the time of the initial attack, Dow Jones has fallen around 7%, S&P 500 by around 5.5% and NASDAQ by 4.5% over the past 3 weeks. Apart from US stocks, here’s how other major global indices have fared as of Friday the 20th March.
o Shanghai Composite Index fallen by 5%
o Japan Nikkei 225 index fallen by 9%
o India’s Nifty50 fallen by 8%
o Hong Kong’s Hang Seng Index fallen by 5%
o London’s FTSE 100 fallen by 9%
o Europe’s STOXX 600 fallen by 10%
o Australia’s ASX fallen by 8%
With regard to the outlook on global stock markets, strategists from Goldman Sachs Group Inc., Morgan Stanley and JPMorgan Chase & Co. point to case for US stocks to remain intact despite risks posed by the war with Morgan Stanley forecasting bigger negative impact on European and Asian economies due to its higher exposure to fuel costs while U.S. equities could stay relatively less impacted helped by strong energy-sector performance and with global investors shifting to “safer” U.S. assets. At the same time, CGS international said a prolonged war could prompt a 10%-15% contraction in global stocks. overall, there seems to be a conflict in consensus regarding how stock markets would be affected in the short-medium term given the uncertainty on the duration of the conflict and its ramifications.
How are Central Banks reacting to the conflict?
The past week was a decisive week for most central banks, with their scheduled monetary policy decisions. The consensus among most economists prior to February 28th were for most central banks to go for rate cuts given the falling inflation expectation and weakening job market. However, with volatile global energy prices reigniting inflation fears among most countries, the Bank of England, U.S.’s Federal Reserves, the Bank of Japan along with the Bank of Canada all decided to maintain current rates citing middle east uncertainty. Economists argue that energy price hikes are far more dangerous unlike wage-push inflation which can be balanced by increased productivity. Energy inflation would bring about a cascading effect by raising the cost of production, logistics and transport which could have a longer-term impact to inflation.
Against this backdrop, government bond yields from Britain to Italy and the United States have also experienced a considerable volatility over the past three weeks as a chain reaction from heightened inflation pressure. According to The Guardian, UK’s bond yield have surged to their highest levels since 2008 with growing weight for the BoE to raise rates up to three rates this year while CME FedWatch has increased the probability for the U.S. Federal Reserves to raise benchmark rates by at least 25 bps.
What’s going on with gold and what does USD have to do with this?
Gold, typically seen as a safe-haven at times of global uncertainties is behaving in a contrarian manner with prices recording strong downturns. Prior to the Middles East conflict, Gold surged above $5,300 an ounce extending historic rally as economic and geopolitical uncertainties together with weakened confidence in the U.S. dollar in the early months of 2026. However, with Iran-Israel U.S. war, the prices of gold and other precious metals started a sharp fall despite increased market and geopolitical uncertainties. As of last Friday, Gold Spot fell by nearly 19% with gold trading lower than before the war began.
Two specific factors point to this. One being the relatively stronger U.S. Dollar from before the war began. In fact, the dollar has strengthened against all major currencies, once against regaining its place as a safe-haven asset on the back of oil price surge, which are priced in dollars. Given that relative strength of the U.S. Dollars, it now becomes more expensive for international buyers using other currencies to purchase Gold. Due to this, demand from those buyers have declined considerably and has pushed prices down. At the same time, with rising oil prices driving up global inflation, it becomes more difficult for Central Banks and monetary policy decision makers to go for rate cuts. With investors expecting rates to climb higher than its current levels, gold becomes less attractive due to the lack of an interest return while investments can offer high return especially with the possibility of higher rates becoming more than possible than before.
What the global market reaction to the ME conflict could mean for Sri Lanka?
While Frontier Research has put out few reports on the direct economic implications of the ME conflict to the country’s economy, global market reactions to the situation could also have a number of effects to the economy. Starting off with a relatively stronger USD which could mean some depreciation pressure for emerging market currencies including the LKR and thereby a double shock to the oil bill in addition to the already higher oil prices. CT Smith also warns that potential uptick in inflation could limit the likelihood of a Central Bank policy rate reduction in the near term just as for most global central banks. The Sri Lankan stock market has also reacted and remained quite bearish to the ME conflict with over Rs. 1 trillion being wiped off from the Colombo Stock Market since the conflict began according to Ada Derana.