The latest military action in the Middle East has injected fresh uncertainty into global markets, following major combat operations launched by the US and Israel against Iran over the weekend. With regime change now appearing to be the strategic objective – a significant shift from last year’s targeted strikes on nuclear facilities – investors are once again assessing the geopolitical risk premium, the trajectory of oil prices and the potential implications for portfolios.
In this latest Market Perspectives update below, Anthony Willis, Senior Economist at Columbia Threadneedle Investments, examines the immediate market reaction, the critical importance of the Strait of Hormuz, and the broader economic and geopolitical ramifications for investors and financial advisers navigating heightened volatility.
A marked escalation in conflict
This week’s developments go well beyond the events of June 2025, when US action focused specifically on Iran’s nuclear infrastructure. The current offensive, however, has expanded both in scope and intent. The US and Israel are targeting a wide range of military sites and senior leadership figures, including the Supreme Leader.
The US operation – dubbed Operation Epic Fury – began 10 days after President Trump issued Iran with a 15-day ultimatum to agree to a nuclear deal. Although talks reportedly made some progress last week, the offensive was launched before the deadline expired, signalling a hardening stance from Washington.
Despite the seriousness of events, initial financial market reactions have been relatively contained. Equity futures opened down 1%–2%, while oil – the primary transmission mechanism to markets – initially rose around 12% before settling closer to a 7% gain, returning prices to roughly $80 per barrel, similar to levels seen during last June’s 12-day conflict. Notably, this remains below the five-year average oil price.
The Strait of Hormuz: a critical chokepoint
The most significant economic risk centres on the Strait of Hormuz. Approximately 20% of global crude and refined oil supplies pass through the strait, alongside around 20% of global liquefied natural gas shipments.
Although Iran has not formally declared the passage closed, shipping has reportedly been advised not to transit the strait. Three ships have been attacked and shipping insurance has been revoked, creating what appears to be a de facto closure. Numerous vessels are currently at anchor awaiting clarity.
A prolonged disruption – or direct strikes on regional production facilities and export terminals – could push oil prices towards $100 per barrel or higher. That would have meaningful implications for global growth and inflation expectations.
There are, however, mitigating factors. Alternative regional pipelines may soften supply disruption. OPEC has pledged to increase production, and strategic stockpiles could help cushion short-term shocks. Geographically, Asia would likely bear the brunt of sustained higher prices, given that much of the oil transiting Hormuz is destined for that region.
Geopolitical uncertainties and regime risk
Beyond energy markets, the geopolitical outlook remains highly uncertain. Key unknowns include the duration of the conflict and the extent to which the US and Israel are willing to pursue regime change without committing ground forces.
At present, there appears to be no appetite for “boots on the ground”, with airborne strikes the preferred approach. However, Iran’s response has diverged from its more limited retaliation doctrine of recent years.
A successful removal of the current regime could create further instability if no credible opposition or transitional framework is in place. Historical parallels with Iraq and Libya highlight the risk of prolonged instability in the absence of an orderly succession plan.
President Trump may seek a swift resolution and has already indicated a willingness to engage with potential new Iranian leadership. However, Iran has so far resisted dialogue. Domestically, the President lacks explicit Congressional authorisation for a prolonged conflict and, with midterm elections approaching in November, political considerations will weigh heavily on decision-making.
Market resilience and portfolio positioning
For now, markets are adopting a wait-and-see approach. While risk assets have softened modestly, there has been no disorderly repricing.
History suggests that geopolitical shocks can create short-term volatility, but sustained market impact typically requires a deterioration in underlying economic fundamentals. At present, those fundamentals – corporate earnings, economic growth and broader liquidity conditions – remain relatively benign.
As a result, this is unlikely to be the moment for dramatic portfolio repositioning. Risk appetite has proven resilient in recent years, and financial markets often demonstrate an ability to “look through” geopolitical drama once immediate uncertainty subsides.
Nonetheless, advisers should monitor developments closely. The trajectory of oil prices, the status of the Strait of Hormuz and the political dynamics in Washington and Tehran will be key determinants of whether this remains a contained shock or evolves into a more persistent macroeconomic headwind in the weeks ahead.
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