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- Many large economies – which are already dealing with the fallout from Russia’s invasion of Ukraine – have limited bandwidth to absorb another prolonged energy shock.
- At the present time, contagion to emerging markets beyond the Middle East appears limited, although second-order effects could put pressure on weaker regional economies such as Egypt, Pakistan, and potentially Turkey.
Stocks plunged and bond yields spiked this week as fears over spiking energy prices from the widening war in the Middle East rocked global markets.
Tensions escalated significantly over the weekend, with US and Israeli forces striking targets in Iran, resulting in the deaths of the Supreme Leader Ayatollah Ali Khamenei and several senior military officials. Iran has responded with retaliatory attacks on US defence installations across the region, targeting energy facilities in the Gulf, firing drones at a critical gas facility in Qatar and one of Saudi Arabia’s biggest refineries.
In Europe, the benchmark Stoxx Europe 600 was down 3% at lunchtime on Tuesday, while the US S&P 500 opened down almost 2%. The benchmark European gas price has spiked more than 50% since the start of the week and Brent crude prices have risen more than 11% to US$85 a barrel1.
“In the near term, the conflict is negative for global growth,” says Kunjal Gala, Head of Global Emerging Markets. “Long‑duration assets are being repriced to reflect higher risk premia.”
Government bond yields have also sold off, particularly in Europe, as the sharp rise in energy prices has forced traders to dial back expectations on further interest rate cuts. The yield on the 10-year German sovereign bond has risen 4.5% since the start of the conflict2.
Figure 1: A sharp spike in European gas prices
Gulf instability
Gulf countries – such as the UAE, Saudi Arabia and Qatar – have invested heavily to develop their economies as regional business and tourism hubs, and the sudden eruption of the conflict has left hundreds and thousands of foreign nationals stranded.
“Historically, instability has often supported Gulf Cooperation Council (GCC) economies through higher oil prices. How markets balance higher crude prices against rising regional risk premiums will be key. If the conflict is prolonged, we would expect Middle East risk premiums to adjust meaningfully,” says Mohammed Elmi, Senior Portfolio Manager, Emerging Market Debt.
While the Pavlovian response to Middle East tensions is typically to ‘buy the dip’ the key question is whether this time will be different.
“While the Pavlovian response to Middle East tensions is typically to ‘buy the dip’ the key question is whether this time will be different.”
Elmi adds that contagion to emerging markets beyond the Middle East currently appears limited, although second-order effects could put pressure on weaker regional economies such as Egypt, Pakistan, and potentially Türkiye.
Energy volatility
About 25% of total seaborne oil trade3 passes through the Strait of Hormuz – between the Persian Gulf and the Gulf of Oman – and it is effectively shut at the present time. However, the East–West pipeline to the Red Sea and the UAE’s RAK pipeline to the Indian Ocean remain operational.
“Significant disruption – as seen during the Houthi attacks last year – could weigh on global growth and reinforce stagflationary pressures,” says Elmi.
Many large economies – which are already dealing with the fallout from Russia’s invasion of Ukraine – have limited bandwidth to absorb another prolonged energy shock, says Gala.
“We expect intensive diplomatic engagement aimed at containing the crisis. Gulf countries also have strong incentives to stabilise the situation given the risk to ongoing economic transformation programmes,” he says.
“Given these political and economic pressures, we believe the conflict is unlikely to persist beyond a few days or weeks. However, heightened volatility, driven largely by surging energy prices is likely in the near term,” he adds.
1 Bloomberg as at 3 March 2026
2 Ibid.
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