Over the past month, the escalation of the Middle East conflict has dominated global financial markets. Disruptions to shipping through the Gulf have raised freight and insurance costs, pushed up energy input prices, and begun to weigh on business activity across the US, UK, Europe, and Japan, while China has faced renewed supply chain stress and trade uncertainty. At the same time, increased defence spending and energy security measures across several regions are adding a fiscal dimension to the inflation shock.
Brent crude is on track to record its largest monthly gain ever, rising approximately 55% in March. The surge in oil prices has triggered a broad reassessment of inflation trajectories, interest rate expectations, and global growth prospects.
In contrast, precious metals have seen a sharp reversal from their record highs. Gold is currently trading at 20% below its late January peak, while Silver is down nearly 40%. Gold has declined more than 13% this month, putting it on track for its steepest fall since October 2008. Likewise, silver followed with an even bigger drop of over 20% in March, marking its largest monthly decline in more than 14 years.
U.S.
The US economy has shown relative resilience, but market conditions have tightened with the conflict showing little sign of de-escalation. In the US, the war has mainly affected business confidence, input costs and policy expectations rather than creating an immediate domestic supply crunch.
The annual inflation rate held steady at 2.4% in February 2026, however, the surge in oil prices is expected to feed into inflation figures suggesting upward CPI pressure in the coming months. Flash PMI data already points to moderating growth momentum, with firms reporting higher input costs and softer demand amid geopolitical uncertainty.
US Treasury yields have moved higher, with the 10-year yield rising toward 4.38%, reflecting expectations that the Federal Reserve may turn hawkish and delay rate cuts. Major US stock indexes fell for the fifth consecutive week with the S&P 500 and Nasdaq declining over 6%. The US dollar has regained strength in the past weeks supported by safe-haven demand due to higher oil prices being USD-denominated.
Eurozone
The Eurozone is facing similar inflationary pressures as the war hits a region that was already growing slowly and remains highly dependent on imported energy. The recent surge in energy prices has reversed earlier disinflation trends, with annual inflation rising to 2.5% in March 2026, up from 1.9% in February, marking the highest rate since January 2025, pushing inflation above the ECB’s 2% target as energy costs soared 4.9%.
The impact has shown up in PMIs, which have weakened as input-cost inflation rises and output expectations soften. The Eurozone flash composite PMI fell to 50.5 in March, a 10-month low, signaling near-stagnation. Business confidence dropped notably among French firms while German private sector growth slowed to a 3-month low.
Government bond yields across the Eurozone have risen as markets price in a more hawkish European Central Bank stance. European equities have declined in line with global markets, with cyclicals and industrials under pressure from weaker demand and higher costs, while defensive sectors and energy-linked names offered partial protection.
UK
The UK has emerged as one of the most exposed developed economies to the current shock. Four weeks into the devastating conflict in the Middle East, 10-year gilts yields have surged to levels last seen during the Global Financial Crisis, ending the period just below 5%.
The UK’s reliance on imported energy and food has amplified the inflationary impacts with the rise in energy prices immediately feeding into consumer prices and eroding household purchasing power. Inflation remains above the BoE’s 2% target and is expected to rise further, despite the central bank holding rates at 3.75% earlier this month in a 9-0 vote.
Growth forecasts have deteriorated sharply, with OECD forecasts for 2026 revised down to ~0.7%. PMI indicators are also expected to weaken as rising costs compress corporate margins and weigh on demand.
In equity markets, the FTSE 100 initially weakened with global risk assets but then showed the usual large-cap defensive support when markets stabilized while the Sterling has remained volatile, pressured by widening deficits and higher borrowing needs.
Japan
Japan appears relatively insulated in the near term due to its domestic inflation dynamics and the Bank of Japan’s cautious policy stance. However, the conflict presents clear downside risks through the trade, energy and currency channels.
Japan’s headline inflation eased for the fourth consecutive month in February, supported by stabilising food prices and government subsidies, even as energy costs began to rise. Even so, Japan’s heavy reliance on imported energy makes it vulnerable to sustained oil price increases, which worsen the trade balance and raise corporate input costs.
Analysts expect surging oil prices from the Iran war and higher import costs from the weak yen will increase pressure on the Bank of Japan to consider policy normalization, with markets now anticipating potential rate hikes as early as April.
Japanese equities were one of the weaker Asian performers during the oil shock, with the Nikkei 225 falling 12% in the broader global risk-off move. The yen weakened against the US Dollar and Japanese government bonds yields have risen with the 10-year yield reaching levels unseen since 1999.
China
China faces a complex mix of external shocks and ongoing domestic structural challenges. Policymakers and corporates have increased currency hedging activity, reflecting concern over renewed yuan volatility amid a stronger US dollar and elevated energy prices.
China’s year-on-year consumer inflation accelerated to the highest in over 3 years in February to 1.3% but remained below the government’s 2% target for the year. As rising global oil prices began seeping into the domestic economy, China raised the retail fuel price caps but limited the increase to about half the usual adjustment to cushion consumers.
Recent PMI readings have been low, reflecting weak domestic demand and its reliance on exports to deliver growth. However, manufacturing activity gathered momentum in March as production resumed following the mid-February holiday period.
Despite these challenges, economists suggest that the world’s second-largest economy is relatively well positioned than many peers to withstand the fallout from the Iran war. China’s economy continues to grapple with deflationary pressures. Its energy mix is more diversified away from oil and natural gas; and it has a large strategic oil reserve and access to discounted Russian crude. The People’s Bank of China has reaffirmed its commitment to an “appropriately loose” monetary stance to support liquidity and growth.
Chinese equities were resilient in March, despite volatility from Middle East tensions, with gains in technology and manufacturing sectors. Meanwhile, yields on China’s 10-year government bond have edged lower to around 1.81%, reflecting continued monetary support.
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Sources:
Data and insights sourced from Reuters, Bloomberg, Financial Times, U.S. Bureau of Labor Statistics, Federal Reserve, Bank of England, European Central Bank and OECD.
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