Recent events in the Middle East, including the escalation of military conflict involving Iran, have understandably unsettled financial markets. News headlines can feel confronting, so it’s worth stepping back and looking at how events like this typically affect the global economy and investment markets, and what it may mean for Australian investors.
Why this conflict matters economically
The key reason markets are paying close attention is energy. A significant share of the world’s oil and gas moves through the Strait of Hormuz, a narrow shipping route alongside Iran. When there is conflict in the region, markets worry about potential disruptions to those energy supplies.
As a result, oil prices have risen sharply in recent weeks. Higher oil prices don’t just affect petrol prices — they flow through to transport, manufacturing, food production and electricity costs. That is the main channel through which a distant conflict can affect everyday living costs around the world.
Impact on global inflation
Higher energy prices generally push inflation higher. When fuel and freight costs rise, businesses often pass some of those costs on to consumers over time.
Economists estimate that a sustained increase in oil prices can add meaningfully to inflation, especially if supply disruptions last more than a few weeks. This comes at a time when inflation has only recently begun to ease in many countries, so markets are sensitive to anything that could cause it to re‑ignite.
It’s important to note, however, that past geopolitical shocks have often created short‑term inflation spikes rather than long‑lasting ones, particularly if energy supply routes remain open or alternative supply becomes available.
What this means for interest rates
Inflation expectations are a major driver of interest‑rate decisions.
Before this conflict, many central banks were considering interest‑rate cuts later in the year. Rising energy prices have made them more cautious. The risk is that cutting rates too early could allow inflation to pick up again.
As a result, markets have been pushing out expectations for rate cuts, and in some cases pricing in the possibility that rates stay higher for longer if inflation pressures persist.
In Australia, the Reserve Bank has signalled it is watching global developments closely. Higher oil prices can add to local inflation through fuel and transport costs, which may limit how quickly Australian interest rates can fall.
Share markets: why volatility rises
Share markets generally dislike uncertainty, and geopolitical conflict adds plenty of it.
Higher inflation and higher interest rates can reduce the value investors place on company earnings, particularly for growth‑focused companies. That’s why markets often fall initially when conflicts break out.
However, history shows that share markets tend to recover once uncertainty peaks, even while conflicts are still ongoing. Markets respond more to the economic impact than the headlines themselves. If energy disruptions are contained, markets often stabilise sooner than expected.
It’s also worth remembering that different sectors react differently. Energy producers often benefit from higher prices, while transport, retail and manufacturing can face higher costs.
Bond markets: not always a safe haven
Many people assume bonds always rise during times of crisis. What matters here is whether inflation or fear is the dominant force.
When inflation expectations rise, bond prices typically fall and yields rise. That has been happening recently as investors reassess the outlook for inflation and interest rates globally.
This means bonds may experience short‑term weakness, even though they still play an important role in portfolios by providing income and diversification over the longer term.
What this means for investors
Periods like this are uncomfortable, but they are not unusual. Markets have navigated wars, energy shocks and geopolitical tension many times before.
Key points to keep in mind:
- Market volatility is a normal response to uncertainty
- Inflation and interest‑rate expectations matter more than headlines
- Short‑term market moves rarely change long‑term investment outcomes
- Diversification remains one of the best protections against uncertainty
For long‑term investors, reacting emotionally to market moves can be more damaging than the events themselves. Investment portfolios are built with these kinds of shocks in mind.
If you have concerns about how current events affect your personal situation, please contact your adviser and we can discuss your strategy in light of current market conditions, your goals and investment time frame.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2026. Please do not reproduce without the expressed written consent of the author.