Source: ING THINK
Written by: Carsten Brzeski, Warren Patterson, James Knightley, Lynn Song, Chris Turner, Padhhraic Garvey (CFA), Deepali Bhargava
Compiled and organized by: BitpushNews
From cautious optimism on Friday to a full-scale strike by the United States and Israel on Saturday morning, followed by various uncertainties regarding the future situation, the military actions in the Middle East not only have the potential to reshape the regional landscape, but also may have significant impacts on the global economy and markets.
Key Points of this Article
Two overall scenarios concerning the market
How to think about its impact on the global economy
Global trade: supply shock at the worst possible time
United States: a war that raises domestic prices
Eurozone: the most vulnerable major economy
Asia: inflation and trade balance may come under pressure
What these two scenarios mean for financial markets and the global economy
Current energy supply risks compared to 2022
The following is the main text:
The coordinated strikes on Iran's military, nuclear facilities, and leadership bases, including the reported death of Iranian Supreme Leader Khamenei, have profoundly impacted Iran's political system and fundamentally disrupted what appeared to be a continuing diplomatic process just days ago. Prior to this, the third round of nuclear negotiations had just concluded in Geneva, where the Omani mediator reported "significant progress." But Washington clearly did not see it that way.
The official goal of the United States has far exceeded nuclear containment. President Donald Trump’s direct call to the Iranian people—"Take your government; it will be under your control"—coupled with Israeli Prime Minister Benjamin Netanyahu's assertion of "eliminating the existential threat," has made regime change an explicit objective. This is a significant, legally contentious, and historically dangerous step. There is almost no evidence in Middle Eastern history to support the assumption that civilian populations can take control of order once leadership structures collapse. Power vacuums often lead to civil wars, consolidation of power by hardliners, or prolonged fragmentation; sometimes even all three simultaneously.
Unlike the attacks on Iran last summer, Tehran did not wait long to respond this time. Within four hours, it struck U.S. and Israeli bases in Bahrain, Kuwait, and Qatar, as well as civilian infrastructure across the Persian Gulf, indicating that its emergency plans were long prepared.
Undoubtedly, this remains a rapidly changing environment. From a market perspective, the future may evolve into two relatively abstract overall scenarios.
Two Overall Scenarios Concerning the Market
Currently, the possible military and geopolitical scenarios are numerous and appear to change daily. For financial markets, the point of divergence is both simple and brutal: will all this end within a few days, or will it evolve into a "forever war" involving the entire region?
Scenario 1:
Within four to seven days, followed by an uncertain period inside Iran, the strikes by the U.S. and Israel quickly deplete fixed military targets, the pace of action slows down, and a de facto ceasefire emerges within a week. Iran’s retaliatory actions are constrained, their destructiveness sufficient to have political effects internally but not enough to provoke a decisive counter-escalation from the U.S. There are disturbances in the Strait of Hormuz, but no severe disruptions, partly due to Tehran's own oil exports relying on it. The regime survives either in a weakened state or plunges into chaotic internal transitions.
For the markets, this is the scenario for June 2025: initially, there will be a spike in oil prices, but as concerns about disruption in the Strait of Hormuz ease, the increase will dissipate. This is merely a temporary war premium that will not generate lasting macroeconomic effects.
Scenario 2:
Iran's retaliation forces Trump to act—an eternal war. President Trump stated on Sunday evening that the war could last four to five weeks. Iran's retaliatory actions have affected ten countries, indicating that there will be no signs of de-escalation in the near term. In this more severe scenario, the strikes expand from fixed military targets to infrastructure and mobile assets; although the pace of action slows, the timeline is infinitely extended. In the face of existential threats to its regime's survival, Iran initiates asymmetric economic warfare, including persistent disruptions to tanker traffic, activating Houthi attacks on Red Sea shipping, and attempting to disrupt navigation in the Strait of Hormuz.
Even a partial disruption of a chokepoint handling 20 million barrels of oil and over 100 billion cubic meters (bcm) of liquefied natural gas (LNG) per day would create a historic supply shock. The entire region would descend into instability. The market impacts would be drastically different: oil prices could approach $100 or more, stock markets could face a significant correction, funds could continue flowing into the bond market, global supply chains could suffer long-term destruction, and central banks around the world would find themselves in a dilemma without clear answers.
How to Think About Its Impact on the Global Economy
Global trade: supply shock at the worst possible time. The Iran war is happening at a moment when the global trading system is already under pressure due to Trump's tariff offensive and the fragmentation of supply chains since the COVID-19 pandemic and the Ukraine war. The Strait of Hormuz is the most crucial chokepoint in global energy trade, and it is now a zone of active conflict.
Even without a formal blockade, the commercial repercussions are already apparent: insurance companies are canceling coverage, shipping premiums are skyrocketing, and vessels are rerouting or suspending voyages. The chain reactions extend far beyond the energy sector. The closure of Gulf airspace is disrupting air corridors between Eurasia. If the Houthis become active again in the Red Sea, it will close the alternative routes previously used to maintain cargo transport during the tensions in the Strait of Hormuz.
In a prolonged conflict, rising energy costs, logistics disruptions, and widespread confidence shocks will significantly burden global trade volumes, all while the world economy is already digesting the inflationary and growth consequences of tariffs. This is indeed the worst possible time.
United States: a war that raises domestic prices. For the United States, despite limited trade exposure in the Strait of Hormuz, rising global oil prices will exacerbate the current "cost of living crisis." American consumers are already struggling, and as the midterm election cycle approaches, gasoline prices are politically very sensitive. Rising oil prices will also complicate the future monetary policy path for the Federal Reserve.
With the inflationary impacts of tariffs yet to dissipate, another supply-side inflation shock may make further rate cuts difficult to justify (at least in the near term). At the same time, if the conflict drags on and uncertainty suppresses business investment and consumer confidence, growth prospects will also dim.
The only partially offsetting factor is that the U.S. itself is a major oil producer; rising oil prices benefit the shale oil industry and improve domestic energy trade conditions, although it harms consumer interests. However, this balance is hard to explain politically and is insufficient to offset broader losses economically.
Eurozone: the most vulnerable major economy. Europe is the region most severely impacted by macroeconomic consequences, and the timing is extremely unfavorable. The Eurozone has finally emerged from a prolonged stagnation, showing signs of a temporary recovery—though recently these green shoots have been undermined by new uncertainties regarding tariffs. Now, the region may face an energy shock in addition to the trade shock.
Europe is largely dependent on oil imports, and it imports a significant portion of liquefied natural gas (LNG). A surge in energy prices or potential energy supply disruptions may evoke memories of the energy cost crisis from late 2021 to 2023. There are two significant distinctions compared to that time: Europe no longer needs to "de-risk" from a single, critical energy supplier; and this oil price crisis is occurring at the end of winter rather than at the beginning.
The European Central Bank is in a real quandary. Service sector inflation remains stubborn, and the oil price shock will elevate overall inflation—yet, under the pressures of tariffs, uncertainty, and now energy costs, growth prospects are worsening. An analysis by the European Central Bank in December last year showed that a 14% increase in oil prices would push inflation up by 0.5 percentage points and could reduce GDP growth by 0.1 percentage points. However, this only accounts for price effects, excluding the impacts of supply chain disruptions. Given the fresh memories of recent inflation surges, the European Central Bank is unlikely to view any new inflation spike triggered by oil prices as temporary or even deflationary. However, to see interest rate increases, the eurozone economy must demonstrate significant resilience.
Asia: inflation and trade balance may come under pressure. Currently, thanks to a low starting point of generally controlled inflation, Asia seems able to absorb a surge in oil prices. However, the severity and duration of the price increases will ultimately determine their impact. If high prices persist, Asia, which is particularly vulnerable to oil price fluctuations due to its heavy reliance on imports, will feel the strain; all economies except Australia, Malaysia, and Indonesia have trade deficits in oil and gas, making them exceptionally vulnerable when energy costs rise. If prices continue to increase, three factors will determine the impact:
High reliance on Middle Eastern oil: A significant portion of Asia's crude oil supply comes from the Persian Gulf. Japan and the Philippines rely on the region for nearly 90% of their oil demand, while China and India import about 38% and 46%, respectively. Any disruption in the Strait of Hormuz—this critical route—would limit supply, potentially leading to shortages, thereby slowing commercial activity and putting pressure on Asian manufacturing.
Trade balance under pressure: Even without physical supply disruptions, rising global oil prices will worsen trade balances and increase inflationary pressures. Thailand, South Korea, Vietnam, Taiwan, and the Philippines are the most vulnerable. A mere 10% rise in oil prices could worsen the current account balance by 40-60 basis points. Continued price increases will only deepen these deficits.
Strong inflation transmission: Given that energy comprises a relatively high proportion of the consumption inflation baskets in many emerging Asian economies, rising oil prices will quickly transmit to overall inflation. On average, a 10% increase in oil prices would raise the CPI inflation rate by about 0.2 percentage points.
Our baseline expectation is that overall inflation in most of Asia will rise in 2026 but will remain within the target range for most central banks. However, such a magnitude of price shock—if sustained—could push inflation above the target range and increase the pressure on central banks to tighten policies in the short term.
What These Two Scenarios Mean for Financial Markets and the Global Economy
In Scenario 1, the macro narrative is just noise. There is a temporary spike in oil prices, some adjustments in safe-haven positions, and then a return to established tariffs, growth differentials, and AI-themed agendas.
In Scenario 2, the main transmission channels are oil, uncertainty, and the policy dilemmas facing central banks created by both. In this scenario, oil prices could surge to $100-140. For European gas, if the LNG market starts to absorb a long-term loss of Qatari supply, TTF prices could soar to €80-100 per megawatt hour. Sustained high oil prices could significantly delay monetary policy easing. Although oil price shocks are considered deflationary under certain theories, the recent experiences with inflation will prevent most central banks from responding to new oil price shocks with monetary policy easing.
The initial safe-haven reactions are very clear. Treasury and Bund yields will fall, and gold will rise, as we saw this morning and on Friday (when the market began to anticipate military action). If oil prices remain elevated and inflation accelerates again, the safe-haven rebound will fade.
In terms of exchange rates, investors will revisit the script of March 2022: at that time, U.S. energy independence caused the dollar to rise sharply against the euro and other fossil fuel-importing currencies in Asia. The Fed's trade-weighted dollar index rose over 10% within six months when oil prices remained high for a quarter, while European gas prices stayed elevated for nearly six months.
Both the euro and yen are expected to continue to struggle under the pressure of long-term rising oil prices, and we may also see unusually sharp reversals in emerging market (EM) currencies involved in arbitrage trading. In Europe, this will make the Hungarian forint one of the most vulnerable currencies; the market will closely monitor whether Turkish policymakers can control the capital outflows related to crowded lira arbitrage trades. In summary, this year's favourable cycle of capital flowing from the dollar to emerging markets could reverse and evolve into a vicious cycle.
Current Energy Supply Risks Compared to 2022
For the oil and gas markets, there is likely to be a comparison to 2022 and Russia's invasion of Ukraine. The volume of oil supply at risk due to a complete blockade of the Strait of Hormuz is about 15-20% of global supply, depending on how much Saudi Arabia can reroute through its Red Sea pipeline. This is far higher than the 7-8% of global supply at risk from Russian oil during the early weeks of the Russia-Ukraine war, when Brent crude oil prices surged close to $140 per barrel.
However, what provides some buffer currently is that oil inventory levels are more abundant than before Russia's invasion of Ukraine. OECD inventories are currently approximately 200 million barrels higher than before the Russia-Ukraine war. Nonetheless, a two-week complete blockade would essentially erase this buffer, providing tremendous upward pressure on prices.
For gas, up to 125 billion cubic meters of LNG flows are at risk, which accounts for about 3% of global gas consumption but 22% of global LNG trade. However, the risk from approximately 15 billion cubic meters of LNG exported from Oman is smaller since its vessels do not need to go through the Strait of Hormuz but remain near a dangerous area.
Before the Russian invasion of Ukraine, nearly 160 billion cubic meters of Russian gas (sent to the EU through pipelines and LNG) were at risk. Thanks to the development of LNG export capacity (primarily from the U.S.), the current market situation is relatively good. Since early 2025, we have seen about 40 billion cubic meters of U.S. capacity come online, with another 14 billion cubic meters expected to be added this year, with even more capacity to be released in the coming years. However, as it stands, the new capacity is far from sufficient to compensate for the potential losses from the Persian Gulf supply disruptions.
A tightening market will lead to more intense competition for LNG spot cargoes between Asia and Europe, raising prices. Price-sensitive buyers in Asia may exit the market, while Europe may not repeat the reckless buying spree seen in 2022—in which costs were disregarded.
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