The sudden resumption of hostilities in the Middle East is prompting a critical re-evaluation of market assumptions. While the artificial intelligence revolution drives robust valuations based on long-term growth expectations, other significant factors like rising inflation and geopolitical risks are often dismissed as temporary. This divergence is being tested by the ongoing conflict, which recently saw Brent crude prices surge to US$114.44, up 5.8 per cent, with Wall Street equity markets edging lower and US Treasury yields pushing higher. Recent Iranian drone strikes and a ship fire off the UAE coast underscore the unresolved nature of the conflict and its escalating pressure on the global energy sector, particularly in petrochemicals and the Asia-Pacific region.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, challenges the prevalent Wall Street view that the war and its accompanying energy shock will be short-lived. Shalett suggests the market may be mispricing the duration of these cycles, noting that oil spikes could be long-term factors impacting global capital flows. For instance, Middle Eastern sovereign wealth funds, initially projected to contribute substantially to global data centre build-outs, may now prioritise reconstructing their own infrastructure. This shift, combined with nations building national AI capabilities and shoring up energy security, could keep inflation elevated, diminishing the appeal of bonds versus hard commodities and infrastructure, further driving up yields.
The market is closely monitoring the 30-year US Treasury yield, which recently breached 5.03 per cent, a level Bank of America strategist Michael Hartnett termed the market’s “Maginot Line,” warning it could transform the AI spending boom into a “doom loop.” Macquarie strategist Viktor Shvets outlines three potential outcomes for the US-Iran conflict: a prolonged shadow war, military escalation, or an attempt to economically out-wait Iran. Shvets believes a shadow war leading eventually to a deal is most probable, which would open the Strait of Hormuz for now but highlight Iran’s future ability to weaponise its closure. This scenario suggests a suboptimal stalemate with ongoing implications for energy security and inflation, challenging the notion that these impacts are transitory.
