Conflict in Iran: what next for the markets?

What has happened?

Over the weekend, the US and Israel carried out military strikes against Iran and its leadership. Iran engaged with retaliatory attacks across the region, raising fears of a broader regional war. The Strait of Hormuz, through which 20% of the global oil supply is transported, is being disrupted as insurance companies have stopped covering vessels in the area. 

How have markets reacted

As markets opened on Monday (2 March 2026), oil prices had jumped by roughly 10% due to the supply disruption, despite OPEC (the Organisation of the Petroleum Exporting Countries) announcing higher production. The longer disruptions remain, the longer oil prices are likely to remain elevated. If this happens, we expect inflation to be revised slightly higher for Q2. A prolonged disruption may lead to higher production costs, interfere with trade and diminish consumer confidence.

So far, equity markets have reacted negatively. On Monday morning, US equities were down over 1%, whilst European and Emerging markets dropped by 2% on average. European, Japanese and emerging market stocks tend to be more sensitive to oil prices and their supply comes mainly from the Strait of Hormuz. US and European bond yields rose between 2-3 basis points. The dollar index rose by 0.7%, whilst the gold price increased by over 2%.

What's next?

At this stage, it’s unclear how long this conflict will last and how it could disrupt oil supply, goods and people flows. As the Q4 earnings season comes to a close, we will focus on the consumer confidence, inflation and jobs data, whilst closely monitoring these geopolitical events.

BNP Paribas Asset Management for AXA view

We continue to recommend diversification in 2026. Equities are still our preferred asset class, supported by policy and earnings growth. However, we expect volatility to remain elevated. We favour emerging markets, Europe and Japan to diversify away from US tech and potentially high valuations. We keep currency exposure unhedged to preserve additional diversification. In fixed income we favour short-maturity bonds, to diversify from government bonds. We also prefer gold to diversify against the geopolitical risk.