(Source: Merlea Macro Matters)
Global Markets Outlook — Volatility Rising: How Energy Shocks Are Reshaping Global Markets
The Middle East conflict is the largest global energy shock in over a decade. Disruption to the Strait of Hormuz, which carries about 20% of global oil and LNG flows, has pushed oil above US$100 and lifted inflation risks, particularly for Europe, Asia and Australia. Markets view the Iran war as an energy shock rather than a recession trigger. The base case remains a short conflict, though asymmetric disruption could persist into Q2.
Rising Energy Costs Flow Through the Economy
Because oil affects almost every part of the global economy, the impact is already spreading through broader price measures. When crude prices rise sharply, transport, manufacturing and household energy costs typically follow. This places additional pressure on businesses and consumers alike, increasing the overall cost of living and operating.
Bond Markets React to Inflation Risks
Financial markets have been quick to respond. Government bond markets, which had performed strongly earlier in the year, have weakened as investors reconsider whether interest rates may remain higher for longer. Demand at U.S. Treasury auctions has also softened, reflecting greater uncertainty about inflation and the economic outlook.
Equity Markets Show Diverging Performance
Equity markets are adjusting to the changing environment. Energy producers and defence-related companies have generally benefited from higher oil prices and geopolitical tensions. In contrast, sectors that rely heavily on fuel — such as airlines, logistics companies and large manufacturers — are facing rising costs that could place pressure on profits.
Gold Returns as a Defensive Asset
Gold has once again attracted attention as a defensive investment. During periods when both shares and bonds face pressure at the same time, investors often turn to gold as a store of value and a way to help protect portfolios during uncertain conditions.
Property Markets Deliver Mixed Signals
Property markets present a more mixed picture. Higher interest rates continue to challenge more heavily leveraged areas of the sector. However, segments supported by long-term structural demand — particularly data centres and modern industrial warehouses — are proving more resilient than traditional property sectors.
Economic Risks if Disruptions Continue
If oil supply disruptions continue beyond the next few months, the global economy could face a combination of higher living costs, slower economic growth, and ongoing market volatility. In this environment, maintaining well-diversified investment portfolios becomes increasingly important.
Positioning Portfolios for Uncertainty
From an investment perspective, holding high-quality government bonds remains a sensible strategy. Selective exposure to sectors that benefit from higher energy prices can also provide balance, while essential service industries such as healthcare and utilities tend to perform more steadily during uncertain periods. At the same time, caution may be warranted in higher-risk lending markets, where early signs of stress are beginning to appear.
Bonds
Government Bond Yields, Private Credit Risk, and the Carry‑Trade Wildcard
Government bond yields have reacted unusually for a geopolitical conflict. Instead of a classic flight to safety, yields have risen. Schwab Asset Management notes that 10‑year U.S. Treasury yields climbed sharply after U.S.–Israel strikes, as investors priced in longer‑lasting inflation pressures and fewer expected rate cuts in 2026. Similarly, MSCI’s scenario modelling shows that a sustained Strait of Hormuz shutdown could push U.S. sovereign yields 100–250bps higher under stagflation conditions.
Global bonds have surrendered their year-to-date gains as elevated oil prices stoke fears that inflation will reignite, triggering a selloff across fixed-income markets.
With oil above US$100 and supply still constrained, the likely outcome is persistent inflation, delayed rate cuts, and wider term premiums as investors demand compensation for volatility.
Allianz Research also warns that oil‑driven inflation delays rate cuts across the U.S. and Europe, keeping yields elevated as long as energy markets remain tight.
The private‑credit market faces growing vulnerability as the conflict drags on. Bloomberg highlights simultaneous “credit cracks,” driven by geopolitical tension and existing stress in AI‑exposed lending strategies. Reuters adds that European junk‑bond default insurance has surged to multi‑month highs, reflecting deteriorating risk appetite as investors pull back from riskier assets.
Rising funding costs remain a major concern. Most private‑credit loans are floating‑rate, meaning borrowers immediately absorb the impact of higher-for-longer base rates driven by persistent inflation. Liquidity pressures are also emerging with BlackRock’s decision to restrict withdrawals on its lending fund shows how semi‑liquid structures can come under strain in periods of market stress. Credit spreads are widening across Asia, Europe, and North America, and dividend cuts among major business development companies signal weakening earnings visibility.
The wildcard in this environment is the yen carry trade, which can exacerbate volatility if unwound. When global risk rises sharply, investors who borrowed cheaply in yen to fund higher‑yielding global assets may be forced to repatriate funds. This can strengthen the yen abruptly and trigger broad selloffs in emerging‑market debt, high‑yield credit, and equities.
A prolonged war—with elevated oil prices and heightened volatility—creates ideal conditions for a carry‑trade unwind, potentially amplifying upward pressure on global yields and intensifying stress across private credit.
If the Iran conflict persists, the global environment will likely feature elevated bond yields, growing private‑credit stress, and the destabilising risk of a sudden carry‑trade reversal. This combination reinforces the value of maintaining liquidity, prioritising quality, and adopting disciplined risk management across fixed‑income portfolios.
Listed Property
As we move into the second quarter of 2026, the outlook for the Australian Real Estate Investment Trust (A-REIT) sector is becoming increasingly constructive after a challenging period for listed property. Over the past two years, rising interest rates and higher bond yields weighed heavily on property valuations, driving share prices to trade at significant discounts to the underlying value of assets. These market dynamics created a period of adjustment where investor sentiment was cautious, and the sector was tested by both macroeconomic pressures and shifting expectations for income returns.
Recent reporting suggests that the worst of this adjustment may now be behind us. Asset values are beginning to stabilise, operational performance remains resilient across key segments, and balance sheets are generally in strong shape. While the market is still navigating a higher-rate environment, there are signs that investors are increasingly focusing on the underlying fundamentals rather than purely on headline rate moves. This shift is helping restore confidence and is laying the groundwork for selective opportunities to emerge across the sector.
Retail property continues to demonstrate steady performance. Shopping centres anchored by supermarkets and essential services are generating reliable foot traffic and stable rental growth. Experiential retail offerings, including dining, entertainment, and service-based tenants, are further supporting the relevance of these centres in an increasingly digital shopping landscape. Industrial assets also remain well supported. Demand for logistics and warehouse space continues to benefit from e-commerce growth and supply chain realignment, with vacancy rates in major markets staying historically low, driving rental increases and consistent income streams.
Data-centre and digital infrastructure properties represent another structural growth area. The expansion of cloud computing, artificial intelligence, and digital services is fueling strong demand for specialised facilities with high power capacity and connectivity. A-REITs with exposure to these assets are attracting notable investor interest, given the long-term growth potential.
Financial resilience remains a defining feature of the sector. Average gearing across A-REITs is conservative, and a substantial portion of debt is hedged against interest-rate volatility. This disciplined approach has allowed many trusts to navigate recent rate cycles without major capital raisings or forced asset sales.
While risks remain, particularly with higher bond yields and the potential for additional central bank action, the sector is beginning to move from a period of valuation adjustment toward a phase of measured recovery. For income-focused investors, distribution yields remain attractive, often exceeding 5%, underpinned by stable leases and robust operational performance. Overall, as Q2 2026 unfolds, the combination of stabilising valuations, resilient cash flows, and healthy balance sheets suggests that well-positioned A-REITs are starting to present selective investment opportunities despite the backdrop of a rising-yield environment.
Australian Equities – Cautious Footing
As the second quarter of 2026 unfolds, the Australian equity market balances strong recent performance with growing macroeconomic pressures. After solid returns through 2025 and into early 2026, share prices remain elevated relative to historical norms. The broad market now trades at around 17–18 times forward earnings, above long‑run averages, meaning valuations leave less room for negative surprises. Dividend yields have also declined as rising prices have outpaced earnings, reducing income for investors relative to risk.
Resources Sector Provides Key Support
The resources sector continues to underpin market resilience. Demand for gold, copper, aluminium, lithium, uranium, and rare earths remains strong, driven by global infrastructure projects, the energy transition, and data-centre construction. Australia’s role as a leading supplier of critical minerals adds further support, as these commodities are essential for electric vehicles, renewable energy technologies, and high-tech electronics. Recent gains in commodity prices reflect strong global demand, geopolitical tensions, and constrained supply in some key markets. If conflicts in energy-producing regions persist, supply shocks could push commodity prices even higher, benefiting Australian exporters but potentially increasing volatility in markets that rely on imported inputs.
Inflation and Interest Rate Risks Persist
Despite these pockets of strength, macroeconomic challenges have intensified. Inflation remains sticky, and the Reserve Bank of Australia (RBA) has signalled that rates may need to stay higher for longer if inflationary pressures persist. Adding to the pressure, futures markets are now pricing in the possibility of higher interest rates as early as April, reflecting investor expectations that inflation could remain elevated and further monetary tightening may be required. Higher borrowing costs continue to challenge rate-sensitive sectors such as consumer spending, housing, and discretionary retail. Elevated valuations in these sectors increase the risk of earnings pressure if borrowing costs remain elevated.
Global Headwinds and Supply Shock Risks
Global conditions add further uncertainty. Ongoing geopolitical tension, particularly in the Middle East, raises the risk of volatile oil and commodity prices. A prolonged conflict could restrict the supply of energy and key metals, creating supply shocks that reverberate through global markets. For Australia, these supply disruptions could drive higher transport and input costs, while international caution could dampen demand for export-exposed companies. Weak economic indicators in Europe and parts of Asia may further soften the external environment for Australian exporters.
Sectors Positioned to Withstand Pressure. Several areas of the market remain relatively well placed:
Resources and energy producers: Rising commodity prices and strong balance sheets provide a buffer against volatility. Supply shocks from prolonged conflict could further benefit these firms.
Selected Industrials: Companies tied to infrastructure and defence activity remain resilient.
Healthcare: Some high-quality healthcare firms now trade at more attractive valuations and may recover as conditions stabilise.
These sectors are expected to absorb market swings better than others as uncertainty continues.
America’s Volatility Quarter: Rising Unemployment and Credit Stress Test U.S. Equities
The U.S. equity market enters the second quarter of 2026 facing a far more complicated landscape than investors anticipated at the start of the year. A combination of slower‑than‑expected interest‑rate cuts, early signs of private‑credit stress inside major financial institutions, rising geopolitical risk from the Iran conflict, and now a sharp weakening in the labour market has created a more cautious tone heading into Q2.
One of the most significant developments is the jump in unemployment, which reached 4.4%, according to the latest labour market readings. This increase reflects weakening job creation and slower hiring momentum, with the economy shedding 92,000 jobs in February—its weakest performance in several years. Some economists had already projected that unemployment would drift higher into Q2, rising toward 4.7%, before stabilising later in the year. The recent data suggest the labour market is softening faster than expected.
For equity markets, rising unemployment typically pressures consumer‑driven sectors and increases recession concerns. At the same time, expectations for Federal Reserve policy have shifted meaningfully. Investors had hoped for multiple early‑year cuts, but the Fed has signalled a much slower path, with reductions now expected only gradually as inflation remains sticky and labour markets cool unevenly.
The combination of softer employment and persistent inflation mirrors what economists describe as a potential “stagflation‑style” dynamic, where inflation stays too high even as hiring slows—making it far harder for the Fed to ease aggressively. Adding to these domestic challenges is stirring private‑credit stress. Large private‑credit vehicles and direct‑lending funds have already shown strain, and concerns are growing that major banks could face pressure from exposures to illiquid credit assets if economic conditions deteriorate further. Analysts have warned that cracks in private credit—particularly if unemployment rises—could tighten lending conditions and increase refinancing risks for highly leveraged companies.
This would directly affect equities tied to financials, smaller businesses, and leveraged sectors. Geopolitical developments are also shaping Q2 sentiment. The Iran war continues to disrupt tanker traffic through the Strait of Hormuz, a critical route for global oil and LNG flows. Bloomberg notes that shipping through the strait has slowed dramatically, pushing oil prices higher and amplifying global inflation risks. This environment increases volatility across sectors sensitive to fuel, shipping costs, and global risk appetite. U.S. airlines, industrials, and consumer sectors face pressure, while defence stocks and energy producers could benefit from elevated geopolitical tension.
Morgan Stanley highlights that prolonged conflict remains one of the most significant macro risks heading into mid‑2026. Equity performance in Q2 may therefore become increasingly uneven. Mega‑cap technology companies continue to attract capital, helped by earnings resilience and ongoing investment in AI infrastructure, while cyclical sectors tied to employment and credit conditions face greater headwinds. Yet the broader economic backdrop still includes pockets of strength—the U.S. continues to grow modestly, and corporate profitability remains intact, though more exposed to macro shocks than before.
Overall, the second quarter is shaping up as a period of heightened volatility, where rising unemployment, slower rate cuts, and geopolitical tension require investors to be more selective. Energy, defence, infrastructure, and high‑quality cash‑generative businesses appear better positioned, while consumer‑sensitive and leverage‑dependent sectors may face further pressure if labour‑market weakness continues.
Europe & UK 2026: Europe’s Fragile Expansion Faces a Renewed Energy Constraints
As we move into the second quarter of 2026, Europe’s macroeconomic outlook is being reshaped by the escalation of the war in Iran, primarily through energy markets, inflation expectations, and confidence effects. The near‑term growth trajectory was already subdued entering Q2, but the disruption to shipping through the Strait of Hormuz has added a renewed external shock just as the euro area was hoping to pivot toward easier financial conditions.
On the positive side, Europe enters Q2 with meaningfully stronger energy resilience than in 2022. Gas supply has been diversified away from Russia, LNG import capacity has expanded, and renewables account for a larger share of marginal power generation. As a result, while European gas and power prices have risen sharply since late February, the region is less exposed to outright physical shortages than during the Ukraine crisis. Labour markets are also cooling, wage growth is moderating, and underlying inflation momentum has been easing into Q2—factors that reduce the risk of an uncontrolled inflation spiral.
European power prices climbed sharply during the first week of March, with most major electricity markets in Europe recording weekly averages above €80/MWh. Rising natural gas prices linked to geopolitical tensions in the Middle East played a major role in the increase.
However, Europe’s weaknesses are becoming more visible as Q2 unfolds. Industrial activity remains fragile, and higher energy input costs disproportionately hit manufacturing-heavy economies such as Germany and Italy. Elevated gas and electricity prices squeeze margins in chemicals, metals, and other energy‑intensive sectors, reinforcing Europe’s competitiveness problem at a time when global demand is already soft. Consumer confidence is also vulnerable, particularly if higher wholesale prices begin feeding back into household bills later in the year.
From a policy perspective, the Iran war complicates the ECB’s path. While rate cuts were increasingly expected heading into Q2, a prolonged energy shock risks keeping headline inflation sticky and could slow the pace of easing. At the same time, fiscal space to cushion households and industry is far more limited than in prior crises.
Overall, Europe’s Q2 outlook is one of contained but persistent stress: recession risks remain modest if the conflict is contained, but growth is capped, downside risks dominate, and energy remains the key macro swing factor through mid‑2026.
United Kingdom: UK Inflation Risks Re‑Emerge as Energy Shocks Cloud the Disinflation Path
As Q2 2026 begins, the UK economy faces the Iran war primarily as an inflation and confidence shock rather than a supply crisis. Direct exposure to Middle Eastern gas is limited, supported by North Sea production, Norwegian imports, and diversified LNG infrastructure. However, as a price‑taker in global energy markets, the UK cannot avoid the impact of higher oil and LNG prices triggered by disruption in the Gulf.
The timing is awkward. Entering Q2, UK growth was already modest, productivity weak, and business investment cautious. The renewed energy shock has led to a downgrade in near‑term growth expectations and has increased uncertainty around the disinflation path. While headline inflation had been easing, higher energy costs risk slowing progress toward target and may force the Bank of England to proceed more cautiously with rate cuts than previously anticipated.
Near‑term household impacts are partially cushioned by regulatory mechanisms, which should limit the immediate drag on consumption through Q2. That said, fiscal space is tight, and the government has limited capacity to offset a prolonged external shock without undermining credibility.
In summary, from Q2 onward the UK outlook is one of low growth, asymmetric inflation risk, and delayed policy easing. The duration of Middle East disruptions will be decisive: a short conflict keeps the hit manageable, while a prolonged energy shock would materially worsen the second‑half outlook.
Japan 2026: Stability Plans, China Tensions, and a New Yield Landscape
Japan’s economy is being supported by aggressive fiscal policy and improving wage dynamics, but the Iran conflict has reintroduced upside inflation risks and renewed pressure on bond yields. The interaction between expansionary fiscal policy, higher energy prices, and gradual monetary tightening will be decisive in determining whether Japan’s long‑awaited exit from deflation proves durable over the remainder of 2026.
Japan’s economy in 2026 sits at a critical transition point, moving away from decades of ultra‑low inflation and extraordinary monetary policy toward a more normal macro regime. Growth remains modest, generally expected to run around 0.7–1.0%, but the underlying structure of the economy is improving, supported by firmer wage growth, persistent labour shortages, and sustained corporate investment. The key macro challenge is balancing this fragile recovery against rising fiscal and inflation pressures.
Key risks include inflationary pressure from rising energy costs, potential trade tensions, and the impact of staple price increases on consumption.
A defining feature of the outlook is the new government spending program under Prime Minister Sanae Takaichi, embodied in a record ¥122 trillion FY2026 budget, the largest in Japan’s history. The budget reflects an explicitly expansionary stance aimed at supporting households, lifting long‑term growth potential, and reinforcing national security. Social security spending continues to rise due to demographics and inflation‑linked healthcare costs, while defence spending has reached roughly 2% of GDP, two years ahead of schedule.
At the same time, substantial funds have been allocated to strategic sectors such as semiconductors, artificial intelligence, energy security, and the green transition, signalling a shift from short‑term stimulus toward industrial policy–driven growth.
Complementing the core budget, the government has already rolled out a ¥21 trillion stimulus package, including energy subsidies, tax relief, and cash transfers, designed to cushion households from price pressures and stabilise real incomes in early 2026. In the near term, these measures are likely to support consumption and keep headline inflation from overshooting. However, they also reinforce concerns about fiscal sustainability at a time when Japan has exited negative interest rates and debt‑servicing costs are rising sharply.
The Iran conflict has materially complicated Japan’s inflation and rates outlook. Japan is heavily dependent on imported energy, and the surge in oil prices following disruptions in the Strait of Hormuz has quickly translated into higher inflation expectations. While energy subsidies may temporarily suppress headline CPI, sustained high oil prices risk lifting underlying inflation later in 2026, particularly if the yen weakens further.
Financial markets have responded accordingly. Japanese government bond yields have risen sharply, with the 10‑year yield moving above 2% at times as investors price in both higher inflation risk and increased government issuance. The Iran war has intensified global bond sell‑offs, and Japan has not been immune, despite still‑strong domestic demand for JGBs. This places the Bank of Japan in a difficult position: rising inflation argues for further policy normalisation, while weak growth and fiscal expansion argue for caution.
China’s Next Chapter: Policy and Innovation
As China moves into the second quarter of 2026, the macro backdrop is increasingly relevant for global commodity strategy. Growth momentum has stabilised but remains subdued, with policymakers signalling a deliberate shift away from credit‑fuelled expansion toward managed, policy‑supported growth. Beijing’s decision to set a relatively modest GDP growth target of 4.5%–5% frames the outlook for commodity demand: supportive, but unlikely to deliver a cyclical surge.
Q2 is the first period in which the outcomes of the March Two Sessions begin to materially influence physical demand. China has adopted an explicitly expansionary fiscal stance, with total fiscal expenditure projected to exceed 30 trillion yuan in 2026 and record issuance of government bonds to support infrastructure, technology investment, and local government finances. For commodities, this matters less for headline growth and more for composition.
Demand is being redirected toward industrial metals linked to grid upgrades, transport infrastructure, renewable energy, electric vehicles, and advanced manufacturing, rather than property‑heavy steel and bulk materials.
Beijing’s renewed emphasis on energy security and supply‑chain resilience reinforces medium‑term support for copper, aluminium, nickel, and critical minerals. At the same time, policymakers have shown little appetite for reigniting a property‑led construction boom, suggesting that iron ore and traditional steel demand will remain capped through Q2, despite episodic stimulus headlines. From a commodity strategy perspective, China is shifting from volume growth to intensity‑driven demand in select inputs.
With more than 50% of its crude oil imports coming from the Middle East in 2024, China is highly exposed to any disruption of the Strait of Hormuz. This vulnerability is compounded by the fact that sanctioned suppliers—Russia, Iran, and Venezuela—made up approximately one‑third of China’s crude import portfolio.
The Iran conflict introduces a powerful external variable into this framework. China is the world’s largest energy importer, sourcing roughly 70% of its oil and gas from abroad, with significant exposure to Middle Eastern supply routes. Disruptions around the Strait of Hormuz and higher global oil prices raise China’s marginal energy costs, tightening conditions for energy‑intensive industries as Q2 unfolds.
While state controls and long‑term contracts dampen immediate pass‑through, sustained oil prices above recent norms would lift input costs across petrochemicals, transport, and manufacturing.
For commodities, this dynamic has two implications. First, higher oil prices provide near‑term support for energy markets and energy‑linked commodities, particularly LNG and refined products. Second, energy‑driven cost pressures increase the strategic value of metals linked to electrification and energy efficiency, reinforcing China’s policy‑backed demand for copper, lithium, and grid‑related materials.
Bond markets add constraint. Record government bond issuance and rising global yields linked to energy‑driven inflation risk have placed gentle upward pressure on Chinese sovereign yields. While yields remain low by global standards, this limits the scope for aggressive monetary easing and places greater weight on targeted fiscal support. For commodities, this reinforces a floor under demand rather than a stimulus‑driven spike.
China enters Q2 2026, the commodity outlook is increasingly bifurcated. Policy support, fiscal expansion, and energy security priorities favour select industrial and energy‑transition commodities, while bulk materials tied to property remain structurally constrained. The Iran conflict amplifies energy price risks and reinforces the strategic premium on secure, electrification‑linked supply chains, shaping a more selective and policy‑driven commodity cycle rather than a broad‑based boom.
Emerging Markets Under Pressure: Energy Shock Drives a New Divide
As the global economy enters the second quarter of 2026, the macro-outlook for emerging markets (EM) has become increasingly uneven. After a period of relative stabilisation in late 2025, the escalation of the Iran war has reintroduced a familiar stress dynamic for EM assets, centred on higher energy prices, rising inflation risk, and tighter financial conditions. While some emerging economies remain resilient, others are now facing material headwinds that threaten to slow growth and delay policy easing.
At the aggregate level, EM growth remains moderate but fragile. Many countries began 2026 benefiting from easing domestic inflation and expectations that global monetary conditions would gradually loosen. Those assumptions have been challenged by the effective disruption of shipping through the Strait of Hormuz, a critical chokepoint for roughly one‑fifth of global oil and liquified natural gas flows. The resulting surge in oil prices has quickly transmitted into higher global inflation expectations, with particularly acute consequences for energy‑dependent emerging economies.
As the global economy enters the second quarter of 2026, the macro-outlook for emerging markets (EM) has become increasingly uneven. After a period of relative stabilisation in late 2025, the escalation of the Iran war has reintroduced a familiar stress dynamic for EM assets, centred on higher energy prices, rising inflation risk, and tighter financial conditions.
The most significant headwinds are facing energy‑importing EMs. Economies such as India, Turkey, South Africa, and much of Southeast Asia are highly sensitive to oil price shocks. Higher fuel costs feed directly into consumer inflation, widen current‑account deficits, and place renewed pressure on local currencies. In many of these countries, energy and transport still make up a large share of consumer price baskets, amplifying the inflationary impact relative to developed markets. As a result, central banks are being forced to remain cautious or hawkish even as domestic growth momentum weakens.
Financial conditions have tightened in parallel. Rising oil prices have pushed global bond yields higher and forced investors to reprice inflation risk, reducing expectations for near‑term rate cuts across much of the emerging world. For EM sovereigns, this has translated into higher borrowing costs, increased currency volatility, and more selective capital flows. Countries with large external financing needs, high foreign‑currency debt, or limited foreign‑exchange reserves are particularly exposed to this shift in market sentiment.
By contrast, commodity‑exporting emerging markets have experienced a more mixed but generally more favourable impact. Energy exporters in parts of Latin America, the Middle East outside the conflict zone, and select African economies are benefiting from improved terms of trade, stronger fiscal revenues, and better external balances. However, even for these countries, gains are being tempered by higher global yields and elevated geopolitical risk premia, which cap equity valuations and limit the upside in local bond markets.
A key feature of the Q2 outlook is growing divergence within the EM universe. Economies with credible policy frameworks, strong reserve buffers, and domestically funded financial systems have been better positioned to absorb the shock. In contrast, more fragile EMs are facing a combination of imported inflation, constrained policy flexibility, and tightening external financing conditions.
In summary, entering Q2 2026, emerging markets can no longer be viewed as a single macro trade. The Iran war has reinforced the importance of energy exposure, external balances, and policy credibility in determining performance. While some EMs will continue to demonstrate resilience, others face renewed headwinds that will weigh on growth, delay monetary easing, and increase volatility across currencies, bonds, and equities over the remainder of the year.
Commodities Sector How the War Is Reshaping Commodity Markets and Global Inflation
The war has evolved into a broad‑based commodity shock, with effects extending beyond oil into gas, industrial metals, food, and precious metals. While price responses differ by asset, the common thread is a rise in geopolitical risk premia, supply insecurity, and longer‑dated inflation uncertainty. Markets are increasingly pricing not just immediate disruption, but a structural shift toward higher scarcity and volatility.
Oil and gas remain the primary transmission channels. Risk around key production zones and shipping routes has tightened physical markets and lifted forward curves, even where supply has not been fully interrupted. Natural gas—particularly LNG—has been similarly affected as higher insurance costs, rerouting, and storage constraints feed directly into marginal pricing. Energy price increases typically affect headline inflation within 1–3 months, with second‑round impacts on transport, utilities, and services emerging over 3–6 months, making energy the fastest inflation impulse from the conflict.
Base metals have responded more selectively. Copper, aluminium, and nickel prices are being supported less by acute shortages and more by cost‑push pressures, as higher energy prices raise smelting and refining costs, alongside precautionary stockpiling by governments and firms. Inflation transmission from base metals is slower, usually influencing producer prices within 6–12 months and consumer inflation only indirectly through manufactured goods. However, once embedded, these pressures tend to be persistent.
Rare earths and critical minerals reflect a strategic rather than cyclical dynamic. Prices are being driven by supply‑chain security, export controls, and state intervention rather than spot scarcity. Governments are increasingly willing to subsidise domestic supply and hold inventories, supporting prices even in the absence of demand surges. Inflation pass‑through here is slow and uneven—often 12–24 months—but the strategic premium can last for years.
Food commodities represent a secondary but potent channel. Higher energy prices raise fertiliser, transport, and processing costs, while shipping disruptions affect grains and edible oils. Food inflation typically reaches consumers with a lag of 3–9 months, but once it does, it carries outsized social and political consequences, particularly in emerging markets.
Precious metals occupy a distinct role. Gold has been a clear beneficiary as geopolitical risk, energy‑driven inflation uncertainty, and constrained central‑bank flexibility reinforce demand for monetary hedges. Gold reacts immediately, often moving ahead of official inflation data via real yields, breakevens, and currency volatility. Silver benefits from safe‑haven flows but remains partially tied to industrial demand, while platinum‑group metals are more exposed to cyclical headwinds.
The evolving conflict has triggered sharp moves across commodities tied to the region, where supply chains for oil, fertilizers, chemicals, and metals remain highly concentrated. Early price reactions largely reflect how exposed each commodity is to Middle East supply, with oil and fertilizers showing the most immediate impact.
Is this the start of a super‑cycle? Not definitively, but the conditions are forming. True super‑cycles require sustained under‑investment, persistent demand, and long supply constraints. The war accelerates all three by raising capital costs, discouraging investment, and increasing state involvement in resource security. Rather than a one‑off shock, this appears to be the early phase of a geopolitically driven commodity regime, with higher average prices, longer inflation tails, and greater dispersion across assets.
