ClockWise: Market reacts to conflict in the Middle East

Equity markets have rallied back a long way since the lows reached in April. Having fallen into bear market territory (down 20%) at one point in April, most major indices are now back near their all-time highs as progress towards trade deals has seen volatility fall.

Last week, Israel’s strikes on Iranian nuclear and military infrastructure saw volatility rise again. It is uncertain how much further things will escalate from here; we also consider the potential for another inflationary shock as we saw in 2022 and how this reiterates the importance of assets like commodities in a diversified portfolio.

The initial reaction from markets saw commodity prices rise broadly, with oil prices in particular spiking by more than 7% last Friday. This move higher in oil took broad commodities to levels last seen before Liberation Day (Chart 1), after which commodity prices fell on fears that reciprocal tariffs could cause a global recession. Markets are now gauging the risks of an escalation in hostilities and broader involvement. Focus is turning to direct threats on tankers passing through the Strait of Hormuz (approx. 20% of daily oil flows) – any disruption to supply here could see prices affected materially. Remember that that Russian invasion of Ukraine in 2022 sent oil prices to over $120 a barrel: alongside the impact of the invasion and its aftermath on natural gas prices and some agricultural prices, that had major knock-on impacts across a wide range of commodities and inflation measures.

Chart 1: Commodities back at pre-Liberation Day levels

Source: LSEG Datastream, RLAM as at 16 June 2025.

So far, despite a sharp move in commodities and a pick-up in equity market volatility, our composite investor sentiment indicator remains neutral – equity investors have looked through the potential disruption to the supply of energy. Should the situation in the Middle East worsen from here, we wouldn’t be surprised to see sentiment deteriorate, potentially offering a dip that contrarian investors may want to buy (Chart 2).

Chart 2: RLAM Composite Sentiment Indicator

Source: LSEG Datastream, RLAM as at 13 June 2025.

An increase in geopolitical tensions and conflict is becoming a reoccurring theme. Over recent years the number of state-based conflicts in the world has steadily risen to the highest levels since 1946[1]. The severity of these conflicts has also been worsening; the number of people dying in these conflicts rose to a level not seen since the 1970s in 2022, although was a little lower in 2023 according to the latest data available[2]. This increase in geopolitical risk is one several reasons we believe that we are heading into a new regime we call ‘Spikeflation’.

This increase in geopolitical risk is one of several reasons why we believe that we are heading into a new regime we call ‘Spikeflation’

Spikeflation is a regime characterised by periodic spikes in inflation on the back of a range of structural drivers including heightened geopolitical risk, underinvestment in fossil fuel capacity and deglobalisation, including Brexit. This new era of Spikeflation has two major implications for investment strategy, in our view. First, investors should look to include inflation-hedging assets like commodities or commercial property in their multi asset portfolios to maintain greater purchasing power. Second, they should be braced for much shorter boom-bust cycles as central banks repeatedly step in to bring inflation under control. This backdrop should favour active asset allocation strategies with an Investment Clock approach to adjust exposures as the business cycle evolves.

Chart 3: Driving forces pushing the new regime of ‘Spikeflation’

Source: RLAM as at June 2025.

Source: [1] Number of state-based conflicts, World

Source: [2] Deaths in state-based conflicts by region

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