The Middle East conflict exceeds expectations; Wall Street adopts the "Ukraine" playbook.
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As uncertainty remains over the duration of the Iran conflict, investors are turning to the "Russia-Ukraine conflict" playbook for guidance on market trends.
Many traders are revisiting strategies from after the outbreak of the Russia-Ukraine conflict in 2022, betting that this week’s surge in energy prices will push up inflation, driving continued strength in the U.S. dollar and weakness in bonds and stocks.
Although the market largely shrugged off last year’s 12-day U.S. and Israeli attacks on Iran, investors fear that this time the conflict may last much longer.
“I couldn’t be clearer—use the 2022 playbook,” Mizuho Bank’s London-based Head of Fixed Income, FX, and Commodities Strategy Jordan Rochester told Bloomberg on March 5. “This is both a war and a logistics crisis—a terms-of-trade shock, and 20% of the world’s energy supply can't leave the region, even temporarily.”
The unpredictability of the conflict means sentiment may shift rapidly, and some analysts say it’s too early to assume a shock of the 2022 scale. On Wednesday, media rumors suggested that Iranian officials had contacted the CIA and sought negotiations, easing stock markets and halting the dollar’s rise. Oil gave back some gains.
Market Reaction Echoes 2022
The market reaction since the Middle East conflict began has noticeably echoed the days after the Russia-Ukraine conflict broke out. Brent crude has jumped above $82 per barrel, natural gas soared to its highest since 2023. Global equity indices fell 2%, Korea’s Kospi saw its biggest drop on record. U.S. Treasuries fell, due to concerns that inflation would limit Fed rate cuts and the traditional safe-haven status of U.S. debt. The dollar strengthened against all major currencies.
“Investors are getting nervous,” Bilal Hafeez, Macro Hive Ltd’s chief strategist, wrote in a Tuesday note to clients. “On Monday, they expected the Middle East conflict to be brief—U.S. stocks even finished higher that day. But today, the market is beginning to price in a more prolonged conflict.”
He said that if the 1990 Gulf War is used as a template, this could mean oil rises to $100 in a month, the S&P 500 stalls or falls by more than 10%. If bonds behave as in previous conflicts, the 10-year Treasury yield might climb to 4.25%-4.6%, while the dollar could further strengthen against the euro and yen.
Matthew Haupt, a hedge fund manager at Wilson Asset Management, is also looking for clues from the Russia-Ukraine conflict four years ago. “We’re seeing pure liquidation—in some sense, not even safe-haven assets are safe,” said Haupt, who closed oil bullish positions this week. “The current playbook is similar to what we saw during Ukraine, but this time it’s about oil, and the risks could be even greater.”
Inflation Shock Fears Rekindled
The main concern in the market is that Middle East turmoil will transmit inflation shocks globally, resembling how the 2022 Russia-Ukraine conflict disrupted supply chains and forced governments to spend to protect industry and consumers. EU governments alone pledged over €500 billion ($582 billion), financed by borrowing.
At the time, a broad gauge of dollar strength rose 6% from February 24 to the year's end. Inflation fears drove the 2-year Treasury yield up more than 2.8 percentage points over the same period, while the 10-year yield rose 1.9 percentage points. Gold dropped, and the S&P 500 fell 19% that year—the steepest decline since the 2008 financial crisis.
Although European gas prices have soared up to 85% since Friday, they're still far below the peak set in 2022. But with Russian energy still constrained, any incremental supply loss may have a big inflation impact, meaning the risks for Europe could be higher this time. Citi strategists said a conflict lasting over two weeks could push gas prices from about €55 to €100 per megawatt-hour.
UK and European yields surged this week as traders ruled out Bank of England rate cuts and even began to consider ECB rate hikes. This repricing reflects inflation concerns and the potential for governments already ramping up defense spending to borrow more.
Higher oil and gas prices have dragged the euro below $1.16, its lowest since November. Options briefly echoed this pressure, with one-week euro sentiment hitting the most bearish since 2022.
Geopolitical Risks Expand
Howe Chung Wan, Principal Asset Management’s head of Asian fixed income overseeing over $590 billion in assets, is also watching the 2022 energy disruption playbook, though he expects the risk from war with Iran to be even more significant.
“Ukraine-Russia oil impact was primarily in Europe, but this is much broader,” said Howe, who has already taken profits in emerging market bond trades. While previous small-scale conflicts mostly centered on Israel and Iran, “if the Gulf Cooperation Council gets involved militarily, we could see a much bigger change in the Middle East geopolitical landscape.”
JPMorgan also compared current events to 2022. Strategies including Nikolaos Panigirtzoglou noted in a report that retail investors were patient with stocks—avoiding sell-offs in the first month after the Ukraine war began—but far less patient with bonds.
“One month on, once it became clear the war would drag on, triggering a more lasting oil price/inflation shock, retail investors began steadily selling stock and bond funds,” they wrote.
Not Everyone Is Sounding the Alarm
To be sure, not everyone is sounding the alarm. Deutsche Bank strategists pointed out the rise in oil prices can’t compare to some previous bigger crises—such as 2022 and the Gulf War.
Analysts said for the current energy shock to cause sustained S&P 500 declines of over 15%, investors would need to see oil prices soar by at least 50%-100% over several months, broader macro disruption, and hawkish central bank responses.
“The size of the current energy shock is almost nothing compared to 2022,” Wells Fargo macro strategist Erik Nelson said. He told clients to downplay this knee-jerk move and buy euros, targetting a rebound above $1.19.
Goldman Sachs Group Chairman David Solomon said, it will take weeks to know more, but so far market reaction has been “muted.”
Nevertheless, many traders remain cautious. For veteran Rajeev De Mello, who has forty years of market experience, caution is worth it, and the Russia-Ukraine conflict remains among the best guides available to investors.
“Investors are forced to reduce portfolio risk, cutting stocks and corporate credit,” said De Mello, global macro portfolio manager at Gama Asset Management SA, who trimmed bets this week on European, Japanese and emerging market stocks. “The lesson from 2022 is: investors shouldn’t immediately buy the first dip, as more declines can be expected.”
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