Middle East Turmoil Triggers Stagflation Concerns as Global Assets Enter High Volatility Era

Middle East tensions escalate, stirring global markets, with asset prices experiencing increased volatility and concerns about stagflation rising sharply.

Over the past two weeks, major asset classes such as crude oil, gold, and stocks have all seen intense fluctuations, with divergent trends. International oil prices briefly broke through $100 per barrel and then stabilized at high levels, with gains approaching 80% year-to-date; gold, amid rising risk aversion, fell instead of rising, with nearly a 10% monthly decline; overall, Asia-Pacific stock markets remain under pressure, with major indices in Japan and South Korea falling over 7% this month.

Meanwhile, the world faces a “Super Central Bank Week.” On March 18, the Federal Reserve announced it would keep the federal funds rate between 3.50% and 3.75%; major economies like Japan and Canada also chose to hold rates steady. Although policy rates remained unchanged, many central banks mentioned in their statements that rising geopolitical uncertainties could pressure inflation and economic growth prospects.

Industry experts believe that as concerns over energy supply security intensify, transportation risks in the Strait of Hormuz have quickly been priced into oil, boosting inflation expectations, which then spread to various assets through interest rate and exchange rate channels. Market fears have shifted from simple supply and demand issues to geopolitical risks impacting supply chains.

Market Enters High Volatility Phase

From a price perspective, the current wave of volatility still originates in the energy market. Since March, international oil prices have remained high and volatile. WTI crude briefly surpassed $100 per barrel at the start of the month but has since pulled back, currently at $96.41 per barrel, with a nearly 68% increase this year; ICE Brent crude remains around $108 per barrel, with a nearly 50% monthly gain and about 80% year-to-date. Such rapid increases reflect a market re-pricing of supply risks.

Oil price movements are highly event-driven. Early last week, signals from the US suggested a possible easing of conflict, causing prices to dip; but then Iran stated it had no intention of a ceasefire, prompting the market to revise expectations upward, and prices rose again. Analysts generally agree that the key variable now influencing the market has shifted from simple supply-demand dynamics to geopolitical risks affecting transportation and supply stability.

In this context, the Strait of Hormuz has become a critical factor. It handles about 19% of global oil shipments; any disruption would directly push energy prices higher and transmit inflation expectations to other assets. HSBC China notes that the market has not fully priced in this uncertainty.

Rising oil prices quickly boost inflation expectations and constrain monetary policy paths. Meanwhile, a strengthening dollar and tightening liquidity margins have caused gold, traditionally a safe haven, to reverse its previous gains, with a notable correction. On March 19, international gold prices briefly fell to $4,747.50 per ounce, down about 9.5% for the month, breaking a seven-month rising streak. Silver fell even more sharply, declining over 20% this month.

This performance contrasts with past geopolitical conflicts, where gold typically rose. Market analysts believe the main reason is the current macro environment dominated by interest rate and liquidity factors. On one hand, rising oil prices elevate inflation expectations, reducing expectations of Fed rate cuts; on the other hand, liquidity disruptions in the US private credit market have strengthened dollar demand, keeping the dollar index around 100. “Under the dual influence of rising real interest rates and a strong dollar, gold faces short-term pressure,” said Qu Rui, Senior Deputy Director of Research and Development at Orient Securities.

Stock markets have also adjusted, driven by rising inflation expectations, reconfigured interest rate paths, and declining global risk appetite. On March 19, major Asia-Pacific indices all closed lower, with the Nikkei 225 down 3.38% that day and a total decline of 9.31% this month; Korea’s Kospi fell 2.73% on the day, with a 7.7% monthly drop. Saudi Arabia’s market declined 14.66% this month.

Institutional analysts note that Asian markets are more sensitive to oil prices. Manulife Investment’s Asia Equity and Fixed Income teams told reporters that economies heavily reliant on energy imports like Korea, India, and the Philippines may face short-term pressure; while energy-producing economies like Malaysia and Indonesia are more resilient. Overall, Asian market performance still depends on how long high oil prices persist and whether energy transportation is disrupted.

Will the Economy Fall into Stagflation?

In this round of asset adjustments, discussions about stagflation have intensified. Citibank’s Chief Investment Officer states that sharp oil price increases are heightening the risk of stagflation—where inflation rises while growth slows. Amid rising uncertainties, investors are refocusing on high-quality growth assets.

However, some believe that the environment has not yet entered a typical stagflation phase. Guo Jin Securities strategist Mou Yiling points out that with the development of new energy sources, the share of crude oil in the global energy mix continues to decline, weakening its economic impact compared to historical levels. Even if oil prices rise, reaching extreme levels would be necessary to trigger a stagflation shock similar to past episodes. Major economies are still in recovery, and asset price adjustments are more about valuation and expectation realignment.

Policy shifts add new uncertainties. On March 18, the Fed kept interest rates unchanged at 3.50%–3.75%, in line with expectations, but the statement for the first time mentioned uncertainties related to Middle East geopolitics. Bai Xue, Senior Deputy Director of Research and Development at Orient Securities, notes this indicates geopolitical risks have shifted from peripheral factors to key influences on policy, leading the Fed to adopt a cautious stance with less room for rate cuts this year.

UBS Wealth Management reports that, despite unchanged policy rates, the overall tone remains accommodative, with expectations of a possible rate cut around mid-2026. However, rising inflation expectations have pushed back the timing of rate cuts. Standard Chartered points out that rising oil prices not only boost inflation but may also dampen economic growth, complicating policy outlooks.

Differing policies among major central banks are emerging. The Reserve Bank of Australia continues to hike rates by 25 basis points, citing inflation risks; Indonesia’s central bank removed references to potential rate cuts, signaling a cautious stance; the Bank of Japan kept rates at 0.75%, but voting on the rate showed divisions over the pressure from Middle East conflicts. “Overall, amid geopolitical conflicts and inflation pressures, global monetary policy is shifting from easing to a wait-and-see approach,” said industry insiders.

Energy Remains a Key Variable

Looking ahead, many institutions believe that market trends will continue to heavily depend on developments in the Middle East, especially the Strait of Hormuz’s navigation status. HSBC China expects that, under a baseline scenario, the conflict could last several weeks but not fully disrupt energy shipments. Oil prices are likely to stay high and oscillate; as risk premiums gradually decline, prices may fall back to around $77 per barrel in six months.

Yango Securities strategist Yang Chao warns that if the conflict becomes prolonged, transportation risk premiums could persist, leading to a global macro environment characterized by low growth, high interest rates, and high volatility; if the conflict escalates to disrupt shipments, it could trigger imported inflation and worsen stagflation risks.

Despite short-term volatility, institutions remain rational about medium- and long-term asset prospects. UBS Wealth Management notes that historical data shows markets tend to deliver good returns in the year following intense fluctuations. A long-term, diversified approach remains attractive, provided risk is managed.

Specific allocations include reducing concentration in single assets, enhancing portfolio resilience. For stocks, diversification across sectors and regions is recommended, focusing on high-quality companies with strong profitability and cash flow; for bonds, investment-grade bonds have some support amid risk aversion, while high-yield bonds may face pressure.

Gold, despite short-term pressure, remains a key hedge against geopolitical risks and currency fluctuations. Standard Chartered suggests gradually increasing gold holdings during price corrections and using inflation-linked bonds to hedge inflation risks.

Alternative asset allocations are also gaining attention. UBS believes hedge funds and private markets, due to their low correlation, can help stabilize portfolios. In current volatile environments, some investors may use structured products to participate in potential gains while controlling downside risks.

HSBC China proposes a “barbell strategy”: investing in high-growth sectors like AI and technology on one side, and high-dividend assets and quality bonds on the other, to balance risk and return amid uncertainty.