One week into the war in Iran, global financial markets have weakened and were poised to tumble further on Monday as the price of Brent crude, the global benchmark, exceeded $100 a barrel.
At the nexus of this deterioration is the disruption in energy markets that are critical to global industrial production. With the Strait of Hormuz effectively closed, the current shock is a problem of supply for the oil and natural gas that keep the global industrial base running.
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Unlike a financial crisis, when the Federal Reserve can create electronic reserves and the Treasury can print money, the government cannot print oil to solve this supply problem.
The impact is being felt in equity markets in the United States and Europe, but it’s the Asian economies, which are heavily dependent on oil from the Middle East, that are bearing the brunt of higher energy prices.
Whether it’s the rising cost of jet fuel, fertilizer, petrochemicals or plastics, the impact is spreading to global transportation, manufacturing, metals and food industries. As prices rise, consumption is affected, and, ultimately, corporate earnings erode.
Equity markets are showing signs of this stress. South Korea’s Kospi stock index, which has been the highest performer among the major economies since 2025, lost 11% in the first week of the conflict.
Japan’s Topix index lost 6%, the U.K.’s FTSE 100 lost 4% and the Euro Stoxx 50 lost 7%.
U.S. equity markets, by contrast, have been less affected, in part because of its position as a net energy exporter. The tech-heavy S&P 500 dropped by only 2% in the first week of the war, while the small-cap Russell 2000 lost 4%.
But futures in U.S. equity markets pointed to a sharply lower open on Monday as the price of oil continued to climb.
Financial conditions
The threat of war was already taking its toll on overall financial conditions as the U.S. fleet moved toward Iran earlier in the year, followed by a further drop in the first week of the war.
RSM’s financial conditions indices for the global financial centers are composite measures of risk in their respective equity, bond and money markets.
The RSM US Financial Conditions Index held up well over the past week, suggesting that financial conditions remain a modest tailwind to growth despite a modest selloff across asset classes.
But conditions are in a fragile state and will be at risk if the war continues to expand. Our financial conditions index will provide an early warning of sorts around risk to the economic and financial outlooks.
The takeaway
Asset and commodity markets have reacted rationally to the attack on Iran and the subsequent attacks on the other energy producers in the Mideast.
The degree of loss in the global stock markets has been a function of degree of dependence on Mideast oil.
What is to come will depend on the duration of the hostilities, how long the Strait of Hormuz is effectively closed and how long it takes to rebuild damaged facilities.
As of Sunday, futures markets have priced in a 15% increase in the cost of U.S.-produced crude oil in a year’s time.
That increase will translate into rising gasoline and other commodity prices in the coming days.