Pressure point
Volatility in global financial asset prices is expected to remain persistently elevated throughout the year
More than two months have elapsed since the outbreak of the Iran crisis. The trajectory of the situation remains highly uncertain. This prolonged standoff is likely to reinforce global stagflation and exert significant influence on the pricing dynamics of various financial assets.
Since 2022, the global growth landscape has shifted from prolonged stagnation to stagflation. The former features “three lows and one high” (low growth, low inflation, low interest rates and high government debt), while the latter features “one low and three highs” (low growth, moderately high inflation, relatively high interest rates and high government debt). The key difference between the two lies in inflation, which in turn determines the divergence in interest rate trends.
The marked rise in global inflation since 2022 stems, on the supply side, from disruptions to global industry and supply chains caused by the COVID-19 pandemic and the Ukraine crisis; on the demand side, it reflects the unprecedented macroeconomic policy easing adopted by various countries after the pandemic, which boosted household consumption.
Over the past two to three years, global inflation has moderated to some extent. However, the ongoing Iran crisis and the resultant surge in global commodity prices represent yet another major supply-side shock to the world economy — following the pandemic and the Ukraine crisis. With aggregate demand unchanged, this results in lower economic growth and higher inflation, thereby further entrenching global stagflation. For instance, in its latest World Economic Outlook released in April, the International Monetary Fund revised down its global growth forecast for the year from 3.3 percent to 3.1 percent.
The Iran crisis has already roiled global financial markets since its eruption. Given the high uncertainty over the conflict’s future course, global financial asset prices are expected to fluctuate wildly throughout 2026.
The conflict has driven up global crude oil and natural gas prices markedly. Since it broke out, crude oil prices have soared from around $60 to as high as $110 a barrel — an increase of more than 80 percent, with natural gas prices posting similar gains. A preliminary consensus has emerged among global investors: Even if the confrontation ends in the near term, crude oil prices will likely remain around $90 a barrel for the rest of the year. Should the confrontation persist, prices may break through the $110 to $120 range. More importantly, higher oil and gas prices will pass through to downstream goods, including electricity, chemicals, fertilizers and food. Rising pesticide and food prices would place noticeable pressure on emerging markets and developing economies, potentially triggering humanitarian crises.
The confrontation has sharply increased volatility in global equity markets, and the overvalued US stock market could tip into a bear market. Since the outbreak, major global equity indices have all corrected to varying degrees. The US market remains near historic highs, particularly the highly valued artificial intelligence-related tech stocks. Even before the confrontation, some analysts had argued that US stocks faced considerable downward pressure this year. The outbreak has amplified the likelihood of a sharp correction for three reasons. First, the conflict will push up US inflation, interrupting the Federal Reserve’s rate-cut cycle and possibly even forcing a return to rate hikes; second, it has dampened risk appetite and heightened risk aversion among global investors; third, it could drive up electricity prices, constraining the near-term development of the AI industry.
The prolonged confrontation could make the US’ fiscal deficits and government debt less sustainable. Since the outbreak, the 10-year US Treasury yield has risen from around 4 percent to approximately 4.3 percent — an increase of more than 30 basis points. Normally, geopolitical conflicts lead investors to buy more US Treasuries, widely considered the world’s premier safe asset, pushing long-term yields down. The fact that yields have risen instead suggests that investors are now questioning the safe-haven status of these instruments and are less motivated to hold them. If that safe-haven status continues to erode, and if domestic US inflation rises significantly, the possibility that 10-year yields will remain persistently high cannot be ruled out. Given that US federal debt has already exceeded 120 percent of nominal GDP, persistently high long-term yields imply a sharp increase in future debt service burdens. Moreover, the confrontation itself will substantially widen the current US fiscal deficit. Taken together, the US-Israel-Iran conflict is likely to aggravate the unsustainability of the US’ fiscal deficits and government debt.
As the confrontation grinds on, gold prices are likely to reverse their recent decline and move higher. Gold had fallen from around $5,400 to $4,400 per ounce, before recovering to roughly $4,700. The initial price drop — despite heightened geopolitical tensions — mainly reflects the enormous run-up in gold prices over 2024 and 2025, which had already priced in much of the future uncertainty. In addition, gold exchange-traded funds, which are increasingly behaving like speculative investments rather than long-term investments, have grown in scale and influence. Nevertheless, if the confrontation drags on longer than markets expect, and if US Treasuries are no longer seen as a trustworthy safe asset, gold’s unique status as a store of value could drive its price back up — although even in an upward trend, volatility will remain high.
For major economies of the Global South — particularly energy importers — the Iran crisis could lead to higher import costs, slower growth, rising inflation and greater asset price volatility. These countries should consider the following countermeasures: First, if domestic energy prices rise too rapidly, authorities could release strategic petroleum reserves or impose temporary price controls to cushion the impact; second, strengthen monitoring of short-term cross-border capital flows and take steps to prevent excessive outflows; third, prepare policy contingency plans to boost domestic growth based on national circumstances and comparative advantages, so as to cope with the uncertainty stemming from the evolving confrontation.
The author is the deputy director at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a researcher at the National Institute for Global Strategy at the CASS.
The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.
Contact the editor at editor@chinawatch.cn.
