Global Markets Diverge: War's Three Months Reshape Economic Fortunes

Global Markets Divided by Three Months of Iran-Israel Conflict

As the Iran war marks its three-month milestone on May 28, 2026, global financial markets have fractured into clear winners and losers. Persistently high oil prices are causing policymakers to grapple with renewed inflation concerns, while currency depreciation is creating significant headaches for several Asian nations. Conversely, certain assets, most notably oil and the U.S. dollar, have emerged as beneficiaries, bolstered by their safe-haven appeal.

Oil's Far-Reaching Impact and Inflationary Pressures

The conflict has driven oil prices up by approximately 40%, fundamentally altering the outlook for inflation and interest rates. On the physical market, crude prices are consistently above $100 per barrel, having nearly doubled their pre-war levels in early April. Although a historic release of 400 million barrels from major economies' strategic reserves, alongside traders securing alternative supply sources, has somewhat mitigated supply shortfalls, the global energy system remains under considerable strain. This surge in oil costs is a central factor in the current economic landscape, amplifying inflationary pressures worldwide.

AI Boom Shields Stock Markets Amid Geopolitical Tensions

Despite the broader economic turmoil, global stock markets have largely demonstrated resilience. Renewed optimism surrounding artificial intelligence (AI) and lingering hopes for a peace agreement have largely counteracted the negative impacts of the war. U.S. stocks, for instance, have reached record highs, a sentiment mirrored by South Korea's Kospi index. European shares are also nearing all-time peaks. Notably, SK Hynix achieved a market capitalization exceeding $1 trillion for the first time on May 26, joining fellow memory chip giants Samsung Electronics and Micron Technology in this achievement, driven by the AI boom.

However, not all sectors are thriving. The S&P 500 passenger airlines index has fallen over 6% since the conflict began, attributing to global flight disruptions. Similarly, a global luxury basket indicator has dropped 10%, reflecting investor concerns that inflation could curtail consumer spending. Willem Sels, Global CIO at HSBC Private Bank, indicated an underweight position on consumer-related goods and services, viewing it as a hedge against an escalating conflict, noting that U.S. consumption, particularly among affluent households benefiting from AI, has remained relatively strong.

Dollar Reigns as Safe-Haven, Asian Currencies Face Headwinds

The U.S. dollar has solidified its position as a winner, with investors gravitating towards its safe-haven attributes. It has appreciated 1.5% against other major currencies since the war's onset, outperforming both the Swiss franc and the Japanese yen. Rising U.S. Treasury yields have further enhanced the dollar's attractiveness, although some analysts anticipate a potential weakening once the conflict subsides, citing ongoing U.S. policy uncertainties. Van Luu, Global Head of Solutions Strategy at Russell Investments, maintains a neutral stance but projects a weaker dollar in the medium term.

Conversely, Asian currencies have experienced significant pain. Asia historically imported approximately 80% of its oil through the now-restricted Strait of Hormuz, incurring higher fuel costs. This has detrimentally affected economic growth and made several Asian currencies among the worst performers since the war. India's rupee, Indonesia's rupiah, and the Philippine peso have all reached record lows against the dollar, prompting some countries to increase interest rates, such as Sri Lanka's unexpected 100-basis-point hike on May 20, or tap into foreign exchange reserves to stabilize their currencies. China's yuan, bolstered by substantial domestic energy reserves, is an exception, having largely maintained its value.

War's Economic Toll on Energy Importers and Bond Markets

The global economy has been significantly impacted by the oil price surge, particularly nations reliant on imported energy. In the Eurozone, economic activity contracted in May at its sharpest rate in over two-and-a-half years, according to S&P's composite purchasing managers' index. The European Central Bank warned on May 27 that the war's fallout is exacerbating Europe's financial vulnerabilities. British companies also reported a decline in activity and a surge in input prices due to elevated energy costs. The U.S., being self-sufficient in oil and gas and experiencing a boom in AI investment, has felt less of an economic blow, though U.S. gasoline prices have hit a four-year high of $4.56 per gallon due to the global nature of oil markets.

Government bond markets are also in the losing camp. The oil price surge has led traders to price in the risk of higher interest rates to combat energy-driven inflation. Expectations of increased fiscal and military spending have added pressure to longer-dated maturities. The Federal Reserve may soon end its easing bias, as indicated by U.S. 30-year Treasury yields rising above 5% to their highest since 2007. Similarly, German Bund yields have reached over 15-year highs, with traders anticipating at least two European Central Bank rate hikes by year-end.