A Look Back at Markets’ Journey Through the Latest Middle East Conflict

Less than two weeks after the latest Middle East conflict began, rapid twists and turns have culminated in a ceasefire, leading some world leaders to declare the conflict is over. It even seems to have a name: The Twelve Day War.^[i] The final days were anything but calm, including United States involvement, Iranian attacks on a US base in Qatar and even an Iranian parliamentary vote to close the Strait of Hormuz. Time will tell if the ceasefire holds, but for now, we think this is a good opportunity to assess markets’ behaviour during the conflict and see what lessons it holds. In our view, whilst war is always tragic and horrible at a human level, markets tend to digest and move on from these scenarios quite quickly—and seemed to do so this time.

Stocks’ reaction has been rather muted from the start, with returns basically flattish since 13 June.^[ii] For perspective, daily moves were far milder than April’s US tariff-induced wildness.^[iii] Oil appeared to be the main focus amongst commentators we follow, tied to supply concerns given the conflict’s geographical proximity to major production sites and oil shipping routes.^[iv] The prospect of Iranian crude leaving the market or a blocked Strait disrupting tanker traffic caused Brent crude, the global benchmark, to leap from $70.84 on Thursday 12 June, the day before Israeli forces struck Iranian nuclear targets, to $76.00 the next day.^[v] Though Brent crude prices proceeded to climb the following week, they fell sharply Monday, even before the ceasefire was announced.^[vi] Yes, US airstrikes, Iranian counterstrikes on a US base in Qatar and a parliamentary vote to close the Strait all added up to falling crude prices. They have since continued falling, trading at $67.64 as of 26 June’s close—below pre-conflict levels.^[vii]

It may seem counterintuitive that oil prices fell even as the conflict seemed to escalate at the weekend. But our research finds falling uncertainty can be a powerful tonic, and even before the ceasefire, we think investors were beginning to get it. In our view, US airstrikes answered the looming questions over whether and when other major powers would get involved. Iran’s counterstrike on the base in Qatar seemingly disproved widespread warnings that it would retaliate by attacking oil infrastructure in the region. And whilst its legislature voted to close the Strait, that vote was symbolic, in our view. The decision rests with the country’s top leaders, who have never closed the Strait despite multiple threats to do so over the past 40 years.^[viii] That didn’t automatically mean they wouldn’t close it this time, but our research finds markets generally move on probabilities, not possibilities.

In our view, equity markets show this, too, beginning their rebound before the ceasefire was announced. We find this is a classic example of how markets work. At the risk of stating the obvious, war is a terrible, terrible thing. But, according to our research, terrible at a human level doesn’t always translate to terrible in stock or commodity markets. Generally, when regional conflict erupts, we find markets will first reflect the initial fear and uncertainty, and then that initial reaction will fade as the real scope becomes apparent. The MSCI World Index roughly followed this, zigzagging to a slight negative as the conflict broke out, yet starting its recovery before a ceasefire was reached—eventually surpassing pre-conflict levels.^[ix] Israeli markets offer another way to see this, in our view. As we noted last week, the MSCI Israel is up bigtime since the war in Gaza began, and it was the MSCI All-Country World Index’s top-performing nation last year.^[x] The TA-125, a broad local benchmark, rose 6.5% in local currency from market close on 12 June through 23 June, the day of the ceasefire.^[xi] The market with the most direct exposure to the conflict remains resilient.

These situations can change quickly, so we will continue monitoring the situation and keeping our readers updated. But so far, it seems markets are following their typical playbook for regional conflict. Patience and discipline have historically served investors well at times like these, in our view.