Ongoing geopolitical events have cast a shadow on the world’s financial markets with fears over the impact of the conflict and what may come next.
CBN approached Phanos Vladimirou, CFA and Senior Investment Specialist at Athlos Capital to shared his expert view on how the markets have responded and suggest what may be coming next.
Noting that “Over the weekend, the United States and Israel launched strikes against Iran, triggering a rapidly escalating conflict across the Middle East and prompting a sharp reaction across global financial markets,” Vladimirou observed that, “On Monday, 2 March, markets moved aggressively into risk-off mode.”
He explained that, “Specifically, the STOXX Europe 600 opened sharply lower, falling by around 4.5%, while the S&P 500 also experienced significant losses, declining by roughly 2.5%.”
Vladimirou also pointed out that, “Interestingly, even sovereign bonds, which typically act as “safe haven” assets during periods of market stress, came under pressure. In risk-off environments, demand for government bonds usually increases, pushing prices higher and yields lower.
However, this time sovereign bonds also declined as oil (+17%) and gas prices surged, reflecting fears that tanker traffic through the Strait of Hormuz, a critical chokepoint through which roughly 20% of global oil and LNG supply flows, could be disrupted.”
According to the expert, “Such a disruption would likely generate significant inflationary pressures, potentially forcing central banks to keep interest rates higher for longer. In this scenario, expectations for rate cuts by the Federal Reserve could diminish, while in the eurozone markets could even begin pricing in the possibility of rate hikes by the European Central Bank.”
As Vladimirou explained, “In currency markets, the USD emerged as the primary beneficiary as demand for “safe” assets increased. The EUR/USD exchange rate fell sharply to around 1.1550 from approximately 1.18 previously.
However, markets staged a recovery during the US trading session, particularly after the US President Donald Trump stated that the United States would provide insurance support for maritime traffic, including vessels transiting the Strait of Hormuz. The announcement helped ease concerns about disruptions to global energy shipments.”
He also pointed out that, “Market sentiment improved further on Wednesday, 4 March, with a risk-on rebound driven by reports that Iranian officials had reached out to the United States for potential negotiations, raising hopes that the conflict could eventually de-escalate. On Thursday, 5 March, markets reacted positively to comments from, Iran’s Deputy Foreign Minister, who indicated that Iran may be prepared to abandon its nuclear program if the United States presents a satisfactory alternative proposal.”
What comes next
According to the expert, “Ultimately, the trajectory of global markets will depend largely on the duration and scale of the conflict. If the confrontation proves short lived, markets could recover relatively quickly. If Iran is indeed willing to engage in negotiations with the United States and present proposals that satisfy both the US and Israel, leading to de-escalation, financial markets would likely rebound rapidly as geopolitical risk premiums fade.”
“From a strategic perspective,” Vladimirou continued, “a short conflict scenario could involve two primary objectives from the United States and Israel. The first would be neutralizing Iran’s missile launch capabilities, thereby reducing the threat to US bases and regional allies. The second would be disabling Iran’s naval capabilities to ensure the continued safe passage of commercial vessels through the Strait of Hormuz.”
He went on to note that, “If these objectives were achieved, the United States could potentially enter negotiations from a stronger position in pursuit of a renewed nuclear agreement with Iran.”
“Over the longer term, it is also possible that the United States and Israel may support internal opposition groups in an effort to encourage political change within Iran.
However, if the conflict escalates further and the Strait of Hormuz were to close, the consequences for global energy markets could be severe. Oil and gas prices could surge dramatically, with some extreme scenarios suggesting increases of more than 100%. Such an outcome would likely trigger a sharp rise in inflation and lead to significant declines across global equity and bond markets,” Vladimirou pointed out.
“As for Cyprus,” the expert continued, “this war once again highlights that the country’s geopolitical position is both a blessing and a challenge. On one hand, instability in the Middle East can have a significant negative impact on the Cypriot economy, particularly through channels such as tourism, foreign capital inflows and energy imports. On the other hand, the situation underscores Cyprus’ strategic importance in the region, strengthening its role as a key member of the European Union in the Eastern Mediterranean. The coordinated response by several EU countries, including Greece, France, Italy, Spain and others, which announced plans to deploy naval and air military assets to support Cyprus’ security, sends a strong message of regional cooperation and strategic alignment.”
