Financial markets are increasingly struggling to put aside the economic impact of the Iran war, as the ongoing shutdown of the Strait of Hormuz extends the biggest-ever disruption to energy supplies.

Two months into the conflict, the global economy faces a toxic ⁠mix of slowing growth and high inflation – stagflation.

Even as tech ⁠stocks lift world shares, analysts warn that the longer Hormuz remains shut, the greater the recession risk for energy-importing regions.

“The probability of a recession in Europe, the U.K., and parts of Asia is higher than is priced into equity markets,” said RBC BlueBay’s ​head of market strategy Mike Bell.

Here is how the risks are shaping up across markets:

Oil watch

Oil ⁠remains the key barometer.

Before Thursday, Brent crude was trading at around $112 a barrel, more than 50% above pre-war levels, and continues to rise as the war drags on. Early on Thursday, it reached the highest level since the conflict started, surpassing $125 before easing moderately.

High energy prices threaten growth by squeezing consumers and companies while fuelling inflation.

Citi says it’s considering an adverse scenario in which Brent climbs to $120 through year-end, cutting global growth to between 1.5% and 2% and lifting headline inflation to nearly 5%.

Gas prices in Europe and Asia have also risen. Farmers face a second surge in fertilizer prices in four years, while countries including Sweden have warned of potential jet fuel shortages.

Financial conditions

Despite sharply higher borrowing costs, the shock has yet to show up clearly in overall financial conditions.

Market-based measures – which track how asset prices affect funding availability and future growth – tightened to their most restrictive levels since last spring in the U.S. in March, but have since stabilised, helped by April’s equity rally, according to a closely watched Goldman Sachs index.

Conditions have tightened modestly in the eurozone and Japan, driven by rising ⁠borrowing ⁠costs. Britain stands out, with a much sharper tightening that points to a heavier growth hit.

U.S. faces more inflation

The impact varies by exposure to energy flows through Hormuz. In the U.S., gas prices are now below pre-war levels.

Jefferies chief European economist Mohit Kumar said both the scale and nature of the stagflation shock differ across regions.

“Inflation will still be higher in the U.S., but that’s an oil price impact; the impact on growth is much less in the U.S. than in Europe.”

U.S. business activity picked up in April, though output prices jumped. Consumer inflation expectations for the year ahead jumped to 4.7% this month from 3.8% in March, while market-based gauges have also moved higher.

JPMorgan CEO Jamie Dimon said this week that the worst-case scenario of stagflation remained.

Europe in a tight spot

Europe’s reliance on energy imports ⁠leaves it especially vulnerable, with data already pointing to a stagflationary hit.

Data on Thursday is expected to show eurozone inflation nearing 3%. Contracting business activity, tighter bank lending criteria, and surging inflation expectations signal mounting pressure.

Germany’s IMK institute sees a 34% chance the bloc’s largest economy slips into recession in the second quarter, up from 12% in ​March.

ING’s head of global macro, Carsten Brzeski, said another month of Hormuz disruption would likely trigger at least a technical eurozone recession.

U.K. business activity ​has held up better so far, but risks are rising. The International Monetary Fund (IMF) hit Britain with the biggest growth downgrade among rich economies.

Reflecting inflation worries, borrowing costs in Europe have risen faster than elsewhere as traders bet on higher U.K. and eurozone rates. Britain’s ⁠two-year yields are ‌up 90 basis points ‌since the war began.

Equity markets, perhaps more focused on growth, are down 4% in the euro⁠zone and 5% in Britain, while U.S. shares have risen.

Asia hit hard, China outlier

Asia, which typically takes about 80% of Gulf oil exports and 90% of LNG shipments, is bearing the brunt. Parts of South and Southeast Asia are already facing energy shortages.

Foreign ​investors are pulling out of Thailand, and the Philippines is ⁠among the hardest hit, and Indian companies could be under pressure.

Elsewhere, the Bank of Japan raised its ⁠inflation forecasts and looks set to raise rates.

China is the exception. Backed by ample oil reserves and a diversified energy mix, it grew ⁠5% in the first quarter. Investors are ​betting on Chinese battery and electric vehicle companies, while low inflation has helped Chinese bonds rise as others fell.

Still, China is not immune. Higher energy costs could squeeze already thin factory margins just as global demand for its exports slows.

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The Federal Reserve kept its benchmark interest rate unchanged for a third consecutive meeting but signaled potential cuts in the coming months, as policymakers recorded their highest level of dissent since 1992.

The Fed on Wednesday kept its short-term rate at 3.6% and retained language in its statement suggesting the next move would be a rate reduction. Three officials dissented in favor of removing the reference to a future cut, while a fourth, Stephen Miran, dissented in favor of an immediate rate cut on Wednesday.

The dissents underscore the level of division on the Fed’s 12-member rate-setting committee ahead of the departure of Chair Jerome Powell, whose term ends May 15. The Senate Banking Committee approved his successor, Trump appointee Kevin Warsh, earlier Wednesday on a party-line vote. Warsh has argued in favor of rate cuts, as Trump has demanded.

“Developments in the Middle East are contributing to a high level of uncertainty about the economic outlook,” the Fed said in a statement after its two-day meeting. “Inflation is elevated, in part reflecting the recent increase in global energy prices.”

Warsh has promised “regime change” at the central bank and may make sweeping changes to its economic models, communications strategies, and balance sheet, but he will likely find it harder to implement the rate cuts Trump seeks with inflation topping 3%, above the Fed’s target of 2%.

Separately, the Senate Banking Committee is scheduled to vote on the nomination of Kevin Warsh to succeed Powell. The nomination is expected to be approved on a party-line vote, and will then be taken up by the full Senate next month. President Donald Trump nominated Warsh, a former top Fed official, in January. Last year, Warsh echoed Trump’s calls for the Fed to lower its key interest rate, leading many Democrats in Congress to question how independently he will operate as Fed chair.

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Gold is known as a top safe haven asset in times of volatility, but with the war in the Middle East, this classic standing has been challenged as investment volumes fell in the first quarter, industry data showed Wednesday, as the conflict forced some investors to liquidate holdings to raise cash.

Investment volumes fell by 5% during the quarter, according to the World Gold Council (WGC), despite gold having set a record high in January as investors sought refuge from a weak dollar and U.S. President Donald Trump’s erratic policy shifts.

“Hefty outflows in March reversed much of the sizable January and February inflows” into gold exchange-traded funds (ETFs), an easy means to invest in the precious metal, the council said in its quarterly report.

And that was linked in particular to North American funds.

“Oftentimes, because gold is so widely accepted, it is the first thing that you sell when you need a certain access to cash or to liquidity,” said World Gold Council expert Juan Carlos Artigas.

Following the U.S.-Israeli attacks on Iran at the end of February, Tehran closed traffic through the Strait of Hormuz, through which a fifth of the world’s oil and liquefied natural gas (LNG) normally flows.

That sent oil and gas prices rocketing higher and disrupting markets, forcing many investors to raise cash to settle their positions.

The prospect of the U.S. Federal Reserve (Fed) raising interest rates in response to higher inflation boosted the dollar, making gold more expensive for investors who don’t hold dollars.

If demand for gold dropped by volume, the value of purchases jumped by 62%.

Gold touched a new record just shy of $5,600 per ounce at the end of January, and averaged $4,873 per ounce over the quarter.

High prices, driven largely by investment holdings, hit demand for jewellery, however.

The jewelry market was also disrupted by the war, with the Middle East a key shipping hub.

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Gold demand in Türkiye reached a new record in value terms in the first quarter, driven by strong investor appetite for bar and coins, industry data showed on Wednesday.

The precious metal is seen as a safe-haven asset in times of volatility, and Turks have long seen it as a portable, tangible store of wealth.

Bar and coin demand in Türkiye rose 29% year-over-year in the January-March period to 26.1 metric tons, according to a report by the World Gold Council (WGC).

That marked the highest level in seven quarters.

In value terms, the bar and coin demand hit a record $4.5 billion, based on an average gold price of about $4,872 per ounce during the quarter, the report said.

Gold touched a new record just shy of $5,600 per ounce at the end of January, as investors sought refuge from a weak dollar and U.S. President Donald Trump’s erratic policy shifts.

However, it has been declining since late February after the Iran war forced some investors to liquidate holdings to raise cash.

Türkiye has among the highest levels of household gold ownership in the world. Record gold prices are said to have lifted the value of the Turks’ holdings to nearly half the size of Türkiye’s $1.57 trillion economy.

The precious metal, given as gifts at weddings and passed down through generations, is a hedge against inflation and a permissible investment under Islamic tradition that spurns interest-bearing banking.

According to the Turkish central bank, about $600 billion of the total stock is “under‑the‑mattress,” or “under-the-pillow” in Turkish: gold held by households and companies outside the banking system.

Worldwide, gold demand also reached record levels in monetary terms in the first quarter, according to the WGC.

Including over-the-counter (OTC) transactions, the demand increased 2% year-over-year to 1,231 tons in the first quarter, while the total value of demand surged 74% to a record $193 billion as rising prices boosted market volumes.

Physical investment demand, including bars and coins, climbed 42% annually to 474 tons, representing the second-strongest quarterly performance on record. The increase was largely driven by Asian investors seeking protection against market volatility and inflation concerns.

Gold-backed gold exchange-traded funds (ETFs), an easy means to invest in the precious metal, recorded inflows of 62 tons during the quarter. However, the figure remained well below the 230 tons recorded in the first quarter of 2025, mainly due to heavy outflows from U.S.-based funds in March.

Central banks remained net buyers of gold despite increased selling activity during the quarter, purchasing a net 244 tons, up 3% from a year earlier.

High prices, driven largely by investment holdings, and the Iran war hit demand for jewellery, however.

The WGC said jewelry demand volumes fell 23% from a year ago. Total spending still increased 31% as higher prices offset lower purchases.

Following the U.S.-Israeli attacks on Iran at the end of February, Tehran closed traffic through the Strait of Hormuz, through which a fifth of the world’s oil and liquefied natural gas normally flows.

That sent oil and gas prices rocketing higher and disrupting markets, forcing many investors to raise cash to settle their positions.

The prospect of the U.S. Federal Reserve (Fed) raising interest rates in response to higher inflation boosted the dollar, making gold more expensive for investors who don’t hold dollars.

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The process of UniCredit’s takeover of Germany’s Commerzbank is “unstoppable” and will prevail because the business logic is clear, the chief executive of the Italian bank said on Wednesday.

“But if it doesn’t work out, someone else will come along. That’s the reality of the market. Consolidation is inevitable,” Unicredit CEO Andrea Orcel told an interview with Frankfurter Allgemeine Zeitung.

UniCredit and Commerzbank have been in a ​standoff since ​2024, when the Milan-based bank began building ‌up ⁠a stake in the German lender and pressed for ​a merger.

UniCredit currently owns a 27% stake in Commerzbank, making it the largest shareholder in the Frankfurt-based bank. Including ⁠derivatives, the stake is 32.64%, according to a filing last week.

A direct stake of more than 30% treshold would trigger a mandatory takeover offer under German law.

In mid-March, UniCredit announced a voluntary share exchange offer for all outstanding shares.

Commerzbank ​has ⁠been resisting the Italian bank’s advances, aiming ​to remain ​independent. Its management, employees and the German government all oppose a potential hostile takeover.

The German government itself owns 12% of the bank’s shares.

Orcel earlier argued that consolidation is needed to create stronger European banks capable of competing with large U.S. rivals.

UniCredit shareholders are due to vote on a required capital increase for the bid at an extraordinary general meeting on May 4.

Commerzbank has said discussions with UniCredit had failed to demonstrate benefits beyond what it could achieve independently, while also warning of significant execution risks tied to a merger.

It also criticized UniCredit for acting without prior coordination, saying this had undermined trust.

Commerzbank plans to present updated financial targets alongside its first-quarter results on May 8.

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European airlines are confronting their most serious test since the COVID-19 crisis, as the war in Iran drives up jet fuel costs and disrupts travel across the Middle East, threatening the summer holiday season.

Carriers have largely been riding out the crisis with hedges that have tamed costs, even as jet fuel prices have risen nearly 84% since the start of the conflict on Feb. 28, ​but they could face shortages if the war does not end soon.

“There is a ​risk ⁠that we’ll see rationing of fuel supply, particularly in Asia and Europe,” Willie Walsh, head of the International Air Transport Association (IATA), told Reuters on Tuesday, while adding that supply remained robust for now.

Walsh said, however, that the situation was not yet as bad as the disruption caused by the COVID-19 pandemic in 2020, which led to travel demand plummeting and hundreds of billions of dollars in losses for the aviation sector.

“I think COVID was on a completely different scale,” Walsh added. “What we’re seeing here is, in effect, a cost issue for the airlines. The underlying demand for aviation remains robust, and that’s a positive.”

Jet fuel price hedges start to run out

The war has hit airline shares, with on-again-off-again peace talks to end the conflict and reopen the critical Strait of Hormuz to normalize global oil and gas flows in what is the worst energy crisis in ⁠decades.

Airlines ⁠are now warning about their hedges – which help lock in set prices – running out, with outlooks increasingly murky as people delay booking travel or make plans closer to home to avoid potential disruption and higher fares.

Sweden’s Energy Minister Ebba Busch on Tuesday fired an “early warning” about potential jet fuel shortages despite good current supply, cautioning Swedes to think through travel plans.

Ryanair CEO Michael O’Leary, however, played down concerns. “We think the risk of a supply disruption is receding,” he told Reuters, citing conversations with suppliers across Europe earlier in the week.

European budget airline Wizz Air CEO Jozsef Varadi said on Monday that summer bookings were strong. However, easyJet and tour operator TUI announced drops in forward bookings and issued profit warnings in recent ⁠weeks.

Varadi, meanwhile, cautioned that even an end to the conflict would not quickly resolve high fuel prices.

“Even if the war is stopped in Iran, I don’t think this is going to put the fuel price back to what it used to be two months ago,” he told reporters ​in London.

Air France-KLM, British Airways-owner IAG and Lufthansa are set to report first-quarter results starting this week. Between them, they have ​raised prices and cut flight capacity in response to the war.

Winners, losers

Gulf airlines have been the hardest hit, with data from Cirium Ascend showing that flights operated by Middle Eastern operators dropped 50% year-on-year in March, while ⁠bookings for the second and ‌third quarters connecting ‌via the main Gulf hubs are down 42.5%.

Global passenger capacity, however, remains up ⁠near 2% so far in 2026 versus 2025, it said, underscoring wider resilience.

The ‌crisis has, though, dampened margins and sharpened the gap between weaker and stronger players. Some have dodged the impact. Finland’s flag carrier Finnair said the crisis had ​so far had a net positive impact, with ⁠more demand for its Asian flights. Budget airline Norwegian on Tuesday brushed off jet ⁠fuel supply risks.

Cirium Ascend’s head of valuations, George Dimitroff, said airlines have adapted and evolved through various crises and agreed COVID-19 ⁠had been “a much bigger hit.”

“They’re ​much, much more agile now than they were in the previous decade and let alone two or three decades prior when they were pretty hopeless at it,” Dimitroff said.

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