Markets Prepare For Fallout From US Led Airstrikes

US and Israeli strikes on Iran have jolted global markets back into a world where geopolitical risk is not a tail event but a central driver of prices, positioning and policy. Oil is already higher, futures point lower for equities, and the VIX, Wall Street’s fear gauge, has climbed sharply as investors scramble to reprice risk across asset classes. A year that was meant to be about the glide‑path for interest rates is suddenly about missiles, shipping lanes and the durability of risk appetite.

The timing could hardly be more awkward. Major equity indices were trading close to record levels, valuations were stretched, and positioning in some growth sectors had crept back towards the kind of crowded consensus that leaves portfolios vulnerable to shocks. The strikes on targets in Iran, followed by immediate retaliation and threats of further escalation, have delivered exactly the sort of exogenous shock that stress‑tests both sentiment and structure. Index futures in the US and Europe are already shading lower, and dealers talk of a market that feels long, nervous and thin into the weekend.

Oil is the most obvious transmission channel. Brent closed the week around the low‑70s, up roughly 20 per cent year‑to‑date, before jumping close to 3 per cent in the immediate aftermath of the attacks. Several major oil companies and trading houses have paused shipments through the Strait of Hormuz, the narrow corridor that carries a significant share of global crude exports, as they assess both physical and legal risk. Analysts now talk openly about the prospect of a further 10 to 20 dollar spike per barrel if there is no credible sign of de‑escalation over the next 24 to 72 hours, particularly if Tehran leans on its ability to disrupt shipping or threaten infrastructure. A brief, contained episode would still leave the world with a higher energy bill; a prolonged disruption would very quickly become a macro story.

The move in volatility is the cleaner read on how far markets are prepared to go in treating this as something more than a headline scare. The Cboe Volatility Index has already climbed by roughly one‑third in 2026, reflecting a steady build‑up in anxiety around both policy and geopolitics. Into the Iran strikes it has moved up again, with levels in the high‑teens to low‑20s replacing the mid‑teen “complacency” regime that defined much of last year. This is not yet panic, the VIX is some distance from the 30‑plus prints associated with full‑blown risk aversion, but it is a clear sign that investors are paying up for protection rather than trying to sell volatility into every spike.

That shift matters because volatility is both a symptom and a cause. Higher implied volatility tightens financial conditions at the margin, influencing everything from structured‑product flows in Asia to risk‑parity allocations and options‑based hedging in the US. As vol rises, dealers dynamically hedge more aggressively, which in turn can amplify intraday moves in the underlying indices. The net effect is a market that becomes jumpier, more path‑dependent and more sensitive to incremental newsflow. In an environment where tariffs, earnings downgrades and now war headlines are colliding, the feedback loop between volatility and positioning becomes a story in its own right.

Beneath the index level, the contours of this shock look familiar. Energy and defence sit on one side of the ledger, airlines and highly valued growth on the other. Oil and gas producers have already benefited from the gradual grind higher in crude; a sustained risk premium on supply would bolster cash flows further and strengthen the argument for renewed capital expenditure. Defence and aerospace names tend to attract flows whenever the world feels less stable, as governments revisit procurement pipelines and investors look for earnings streams with political tailwinds. At the same time, airlines and travel stocks are squeezed by higher fuel costs and the threat of weaker demand, while expensive, long‑duration growth names are exposed to any combination of higher inflation expectations, higher term premia and a lower tolerance for disappointment.

The regional picture is similarly uneven. Middle Eastern and Gulf markets carry the most immediate exposure, both through proximity and through the potential impact on tourism, real estate and banking if tensions persist. Emerging markets more broadly are vulnerable to a familiar double bind: weaker risk appetite from global investors, and a stronger dollar as capital seeks out liquidity and perceived safety. Higher imported energy costs would add another layer of difficulty for policymakers already trying to manage post‑pandemic inflation, slower growth and delicate domestic politics.

Safe‑haven assets are behaving exactly as the textbooks suggest. Gold, which had already been in demand this year, is once again pulling in flows as investors look for liquid, politically neutral stores of value. The dollar has firmed against a basket of smaller, higher‑beta currencies, reflecting both classic risk‑off dynamics and the simple reality of its role as the world’s funding currency. In credit, spreads have started to edge wider from tight levels, particularly in high yield, although here too the move is more consistent with a repricing of risk than with outright distress. For now, core sovereign bonds retain their status as the ultimate hedge, with buyers emerging in US Treasuries and German Bunds even as the inflation implications of a higher oil price remain unresolved.

That unresolved tension sits at the heart of the policy challenge. If oil spikes but the conflict remains contained, central banks may argue that second‑round effects can be managed and look through the first‑round shock, as they attempted to do in earlier energy episodes. If, however, supply is meaningfully disrupted and crude holds at much higher levels, the risk is that inflation expectations start to drift higher again just as policymakers were tentatively discussing cuts. In that world, the VIX is not just a fear gauge for equities; it is a barometer of whether the hoped‑for soft landing is morphing into something more complicated.

For investors, the message is less about predicting precise outcomes in Tehran or Washington and more about recognising that the global risk regime has shifted. The combination of a higher oil risk premium, a structurally higher VIX and a more fractured geopolitical landscape argues for portfolios that are less reliant on a single macro narrative and more attentive to liquidity, quality and shock absorbers. This is a world in which geopolitical risk has moved from the footnotes of strategy decks to the front page and markets are now starting to price that in.