Source: ING THINK
Authors: Carsten Brzeski, Warren Patterson, James Knightley, Lynn Song, Chris Turner, Padhhraic Garvey (CFA), Deepali Bhargava
Compiled and edited by: BitpushNews
From cautious optimism on Friday to the full-scale attack by the US and Israel on Saturday morning, and the various uncertainties surrounding the future situation, military action in the Middle East could not only reshape the region's landscape but also have a significant impact on the global economy and markets .
Key points of this article
Two general scenarios concerning the market
How to consider its impact on the global economy
Global Trade: Supply Shocks at the Worst Time
United States: A War to Drive Up Domestic Prices
Eurozone: The most vulnerable major economy
Asia: Inflation and trade balance may be under pressure.
What do these two scenarios mean for financial markets and the global economy?
Current energy supply risks compared to 2022
The following is the main text:
The coordinated strikes against Iranian military, nuclear facilities, and leadership bases, including the reported death of Iran's Supreme Leader Ayatollah Khamenei, have profoundly impacted Iran's political system and fundamentally disrupted what appeared to be a continuing diplomatic process just days before. This comes after the third round of nuclear negotiations concluded in Geneva, with Omani mediators reporting "significant progress." Washington, however, clearly does not share this view.
The official goals of the United States have gone far beyond nuclear deterrence. President Donald Trump's direct message to the Iranian people—"Take your government, and it will be yours to control"—coupled with Israeli Prime Minister Benjamin Netanyahu's rhetoric of "eliminating the existential threat," has made regime change a clear objective. This is a significant, legally controversial, and historically extremely dangerous step. Middle Eastern history offers little evidence to support the assumption that a collapse of leadership structures would allow the civilian population to seize control of order. Power vacuums often lead to civil war, hardliner consolidation of power, or prolonged fragmentation; sometimes all three simultaneously.
Unlike the strikes against Iran last summer, Tehran responded quickly this time. Within four hours, it retaliated, attacking Israeli and US bases in Bahrain, Kuwait, and Qatar, as well as civilian infrastructure across the Persian Gulf, demonstrating that its contingency plans were already in place.
Undoubtedly, this remains a rapidly changing environment. From a market perspective, the future may evolve into two rather abstract overall scenarios.
Two general scenarios concerning the market
Currently, the possible military and geopolitical scenarios are numerous and seem to be changing daily. For financial markets, the point of contention is both simple and brutal: will this all end in a few days, or will it escalate into a "perpetual war" affecting the entire region?
Scenario 1:
Four to seven days later, a period of uncertainty ensued within Iran. The US and Israeli strikes quickly exhausted their fixed military targets, slowing the pace of operations and resulting in a de facto ceasefire within a week. Iran's retaliatory actions were restrained, their destructive power sufficient to generate internal political effects but insufficient to trigger a decisive escalation of US retaliation. Disturbances occurred in the Strait of Hormuz, but no serious disruptions took place, partly because Tehran's own oil exports depend on it. The regime either survives in a weakened state or descends into a chaotic internal transition.
For the market, this is the script for June 2025: an initial surge in oil prices, followed by a decline as concerns about a disruption in the Strait of Hormuz ease. This is merely a temporary war premium and will not have lasting macroeconomic impacts.
Scenario 2:
Iran's retaliation has forced Trump to intervene—a perpetual war. President Trump stated Sunday evening that the war could last four to five weeks. Iran's retaliatory actions have already affected 10 countries, indicating no signs of de-escalation in the short term. In this more serious scenario, the strikes expand from fixed military targets to infrastructure and mobile assets, with a slower pace but an indefinitely extended timeline. Faced with a threat to its regime's survival, Iran has launched an asymmetric economic war, including continued harassment of oil tanker traffic, initiating Houthi attacks on Red Sea shipping, and attempts to disrupt navigation in the Strait of Hormuz.
Even a partial disruption to a choke point that handles 20 million barrels of oil and over 100 billion cubic meters (bcm) of liquefied natural gas (LNG) daily would create a historic supply shock. The entire region would be plunged into instability. The market impact would be vastly different: oil prices would head towards $100 and above, stock markets would experience a genuine correction, funds would continue to flow into bond markets, global supply chains would suffer long-term disruption, and central banks would be mired in a dilemma with no clear answers.
How to consider its impact on the global economy
Global Trade: A Supply Shock at the Worst Timing. The Iran war comes at a time when the global trading system is already under pressure from Trump's tariff offensive and supply chain fragmentation since the COVID-19 pandemic and the Ukraine war. The Strait of Hormuz, a vital chokepoint for global energy trade, is now in the midst of an active conflict zone.
Even without a formal blockade, the commercial consequences are already evident: insurance companies are cancelling coverage, shipping premiums are soaring, and ships are detouring or suspending their voyages. The ripple effects extend far beyond the energy sector. The closure of airspace in the Gulf region is disrupting air corridors between Europe and Asia. If the Houthi rebels reactivate in the Red Sea, it will close alternative routes previously used to sustain cargo transport during tensions in the Strait of Hormuz.
In a protracted conflict, the combined effects of rising energy costs, logistical disruptions, and widespread confidence shocks will significantly drag down global trade volumes, at a time when the world economy is already absorbing the inflationary and growth consequences of tariff shocks. This is truly the worst possible time.
United States: A War to Drive Up Domestic Prices. For the United States, despite limited trade exposure to the Strait of Hormuz, rising global oil prices will exacerbate the current "cost of living crisis." American consumers are already struggling financially, and gasoline prices are politically sensitive as the midterm election cycle approaches. Rising oil prices will also complicate the Federal Reserve's future monetary policy path.
With the inflationary effects of tariffs still lingering, another supply-side inflationary shock could make further interest rate cuts difficult to justify (at least in the near term). Meanwhile, if the conflict drags on and uncertainty dampens business investment and consumer confidence, the growth outlook will also darken.
The only partially offsetting factor is that the United States itself is a major oil producer; higher oil prices benefit the shale oil industry and improve domestic energy trading conditions, even though this harms consumer interests. However, this balance is difficult to explain politically and is insufficient economically to compensate for the broader losses.
Eurozone: The Most Vulnerable Major Economy. Europe is the region most severely impacted by the macroeconomic consequences, and the timing is extremely unfavorable. The Eurozone has finally emerged from a long period of stagnation, showing signs of a temporary recovery—although these signs have recently been undermined by new uncertainties surrounding tariffs. Now, the region may face an energy shock on top of the trade shock.
Europe is heavily reliant on imported oil and imports a significant portion of liquefied natural gas (LNG). Soaring energy prices and potential supply disruptions could evoke memories of the energy cost crisis that occurred between late 2021 and 2023. However, there are two key differences: Europe no longer needs to "de-risk" itself from a single major energy supplier; and this oil price crisis is occurring at the end of winter, not at its beginning.
The European Central Bank (ECB) is in a real bind. Inflation in the services sector remains stubborn, and an oil price shock will push up overall inflation—however, the growth outlook is deteriorating under the combined pressures of tariffs, uncertainty, and current energy costs. An ECB analysis last December showed that a 14% rise in oil prices would push inflation up by 0.5 percentage points and could reduce GDP growth by 0.1 percentage points. However, this is only the price effect and does not include the impact of supply chain disruptions. Given the recent surge in inflation, the ECB is unlikely to view any new surge in inflation triggered by oil prices as temporary or even deflationary. However, for interest rate hikes to be seen, the eurozone economy must demonstrate significant resilience.
Asia: Inflation and Trade Balance May Be Under Pressure Currently, Asia appears to be able to absorb the surge in oil prices, thanks to a generally low starting point where inflation is under control. However, the severity and persistence of the price increase will ultimately determine its impact. If prices remain high, Asia is particularly vulnerable to oil price fluctuations due to its heavy reliance on imports; all economies except Australia, Malaysia, and Indonesia have oil and gas trade deficits, making them extremely vulnerable to rising energy costs. If prices continue to rise, three factors will determine its impact:
Heavy dependence on Middle Eastern oil: A large portion of Asia's crude oil supply comes from the Persian Gulf. Japan and the Philippines rely on the region for nearly 90% of their oil demand, while China and India import approximately 38% and 46%, respectively. Any disruption to the Strait of Hormuz—this crucial shipping route—would restrict supply, potentially leading to shortages, thereby slowing commercial activity and putting pressure on Asian manufacturing.
Trade balance under pressure: Even without physical supply disruptions, rising global oil prices will worsen the trade balance and increase inflationary pressures. Thailand, South Korea, Vietnam, Taiwan, and the Philippines are the most vulnerable. A mere 10% increase in oil prices could worsen the current account balance by 40-60 basis points. Continued price increases will only exacerbate these deficits.
Strong inflation transmission: Because energy constitutes a relatively high proportion of the consumer inflation basket in many emerging Asian economies, rising oil prices quickly transmit to overall inflation. On average, a 10% increase in oil prices raises the CPI inflation rate by approximately 0.2 percentage points.
Our baseline expectation is that overall inflation will rise in most of Asia in 2026, but will remain within the target range of most central banks. However, a price shock of this magnitude—if sustained—could push inflation above the target range and increase pressure on central banks to tighten policy in the near term.
What do these two scenarios mean for financial markets and the global economy?
In scenario 1, the macro narrative is merely noise. There will be a temporary surge in oil prices and some adjustments to safe-haven positions, before the focus returns to the established agenda of tariffs, growth disparities, and AI.
In Scenario 2, the primary transmission channels are oil, uncertainty, and the combined central bank policy dilemma created by both. In this scenario, oil prices could surge to $100-140. For European gas, TTF prices could soar to €80-100/MWh if the LNG market begins to absorb the long-term supply losses from Qatar. Sustained high oil prices could significantly delay monetary policy easing. Although oil price shocks are theoretically considered deflationary, recent inflationary experiences will prevent most central banks from responding to new oil price shocks with monetary policy easing.
The initial safe-haven reaction was quite clear. Yields on government and German bonds will fall, and gold will rise, as we saw this morning and on Friday (when markets began to anticipate military action). If oil prices remain high and inflation accelerates again, the safe-haven rally will subside.
Regarding exchange rates, investors will likely revisit the scenario of March 2022: when U.S. energy independence led to a significant rise in the dollar against the euro and other fossil fuel import currencies in Asia. The Federal Reserve's trade-weighted dollar index rose by more than 10% in six months, while crude oil prices remained high for a quarter and European natural gas prices remained high for nearly six months.
Both the euro and the yen are expected to continue to struggle under the pressure of soaring oil prices, while we may also see unusually sharp reversals in emerging market (EM) currencies involved in carry trades. In Europe, this would make the Hungarian forint one of the most vulnerable currencies; the market will also be closely watching whether Turkish policymakers can control capital outflows resulting from crowded lira carry trades. In short, the virtuous cycle of dollars flowing into emerging markets this year could reverse and turn into a vicious cycle.
Current energy supply risks compared to 2022
For the oil and gas market, comparisons to 2022 and the Russian invasion of Ukraine are likely. The amount of oil supply at risk due to the complete blockade of the Strait of Hormuz is estimated at 15-20% of global supply, depending on how much Saudi Arabia can divert through the Red Sea pipeline. This is significantly higher than the 7-8 million barrels per day (approximately 7-8% of global supply) of Russian oil supply at risk at the beginning of the Russia-Ukraine war, when Brent crude prices surged to nearly $140 per barrel.
However, what currently provides some buffer is that oil inventories are more abundant than before Russia's invasion of Ukraine. OECD inventories are currently about 200 million barrels higher than before the Russo-Ukrainian war. Even so, a two-week nationwide lockdown would essentially eliminate this buffer, thus creating significant upside potential for prices.
For natural gas, up to 125 billion cubic meters of LNG flows are at risk, representing about 3% of global natural gas consumption but 22% of global LNG trade. However, the approximately 15 billion cubic meters of LNG exported by Oman are less at risk because their cargo ships do not need to pass through the Strait of Hormuz, but they are still near the danger zone.
Before Russia's invasion of Ukraine, nearly 160 billion cubic meters of Russian natural gas (transported to the EU via pipelines and LNG) were at risk. Thanks to the construction of LNG export capacity (primarily from the US), the market is currently in a relatively better position. Since the beginning of 2025, we have seen approximately 40 billion cubic meters of US capacity come online, with another 14 billion cubic meters to be added this year, and more capacity to be released in the coming years. However, for now, the new capacity is far from sufficient to compensate for the potential supply losses from the Persian Gulf.
Tightening markets will lead to fiercer competition for LNG spot goods between Asia and Europe, driving up prices. Price-sensitive buyers in Asia may withdraw from the market, while Europe may not repeat the mistakes of 2022—that is, frantically buying up LNG regardless of cost.
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