Global market | The threat of an energy shock looms over global growth prospects

Markets experienced a second straight session of sharp and erratic price swings after US and Israeli attacks on Iran last weekend heightened geopolitical tensions. A key concern for investors is the risk of disruption to the Strait of Hormuz, a vital chokepoint that carries about a fifth of the world’s oil supply. Any sustained disruption there could trigger an energy-driven wave of inflation.Reuters reported that strategists say investor fears are growing less about the immediate escalation and more about how long the conflict could continue and what that would mean for energy markets. Market participants are increasingly considering the possibility that a protracted conflict could dampen global economic growth while reigniting inflationary pressures, which have shown signs of easing in recent months.

Oil prices rose for a second day in a row, with Brent crude trading around $81 a barrel, up sharply from around $60 at the start of the year, according to Reuters. The spike in crude oil weighed heavily on stocks. Wall Street’s major indexes fell, with the benchmark S&P 500 down about 0.9% at one point, hitting its lowest level in more than three months. All eleven sectors of the index were in negative territory, underscoring the extent of the sell-off.Global government bonds also initially weakened, although they later recovered some ground as investors reassessed the likely duration and severity of the conflict, Reuters reported. Meanwhile, the Cboe Volatility Index, widely seen as Wall Street’s “fear gauge,” climbed to its highest level in more than three months, reflecting increased uncertainty.

Inflation expectations have also risen. Reuters noted that the five-year U.S. breakeven inflation rate, a market-based measure of price expectations, rose to 2.503% late Monday, the highest level since mid-February. Economists at Goldman Sachs estimate that a sustained 10% increase in oil prices could lift the consumer price index by 28 basis points, reinforcing concerns that energy costs could complicate the inflation outlook.

As a result, expectations for Federal Reserve easing have shifted. Fed funds futures on Tuesday indicated a 56% probability that the central bank would leave rates unchanged at its June meeting, according to CME FedWatch data cited by Reuters. Just a few weeks ago, markets had priced in a more than equal chance of a rate cut by then.

Some investors are reassessing the balance between geopolitical risk and economic resilience. While previous episodes of US-related geopolitical tensions – including developments around Venezuela and Greenland – failed to do lasting damage to stocks, the scale and complexity of the conflict with Iran has led to a more intense market reaction. At the same time, not all participants withdraw. Reuters said some asset managers have seen the recent weakness as a potential buying opportunity, funneling capital into areas they expect will benefit from a broader global recovery once uncertainty subsides.

Also read: World Market | Investors are scrambling for cash as the Iran crisis rocks markets

Despite the week’s pullback, the S&P 500 remains just over 2% below its all-time closing high, underscoring the market’s underlying resilience even amid heightened volatility.

For now, investors are keeping a close eye on developments in the region, mindful that the trajectory of oil prices – and the broader inflation story – could depend on whether the conflict stabilizes quickly or evolves into a longer confrontation.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times)