Financial Panorama

U.S.–Israel–Iran conflict: Reactions from markets and economies

We are monitoring the situation closely and we want to keep you informed of its possible repercussions.

Summary of the conflict

The current conflict is linked to Iran’s development of a nuclear weapons program. In June 2025, a first series of attacks was launched by Israel, followed by the United States, to destroy suspected Iranian uranium enrichment sites.

The strikes on February 26, carried out jointly with Israel, were aimed at destroying Iran’s ballistic and military capabilities. Iran’s response was swift, with the bombing of other Gulf countries, and continues to spread.

The Iranian regime’s goal is to put enough pressure on Qatar, the United Arab Emirates, Saudi Arabia, and Kuwait by bombing certain hotels, for example, to scare away tourists, and by destroying oil infrastructure to reduce revenues. This tactic worked last year during the 12-day war involving U.S. and Israeli strikes and Iran: missiles flew over Qatar, which then managed to negotiate a de-escalation of the conflict.

The Strait of Hormuz, a vital access route

Located between Iran and the United Arab Emirates and Oman, the Strait of Hormuz is the preferred route for transporting more than 20% of the world’s oil and liquefied natural gas: around 80 oil or gas tankers pass through it each day. Iran has declared that it is now closed and extremely dangerous for oil tankers.

The narrowness of the strait makes it vulnerable to Iranian attacks, and marine insurance brokers have announced that they are limiting or terminating coverage for ships transporting oil or gas in this region, effectively preventing transit via this route. There is also a pipeline that can transport oil to the Red Sea, but its limited capacity does not offer an alternative to the Strait of Hormuz.

Temporary solutions, perhaps…

The United States has proposed escorting oil tankers through the strait with U.S. ships and also using a U.S. government agency to insure the “geopolitical risk” incurred by these oil tankers.

For its part, China may seek a quick resolution to the conflict, since it imports 80% of Iran’s oil, which represents 13% to 14% of its maritime imports. It has announced that it will send a special envoy to attempt to mediate the conflict.

Impact on oil prices

The main impact of the current conflict will be reflected in the price of oil and liquefied natural gas. The duration of hostilities, and mainly the blockade of the Strait of Hormuz, will also have repercussions on global growth.

A sharp rise in energy prices would lead to a resurgence of inflation around the world, which would be negative for all economies, particularly those of emerging market countries. This increase in costs, combined with heightened geopolitical risks, would strengthen the U.S. dollar, which is also negative for these countries. A prolonged war could therefore undermine the recovery that this asset class has been experiencing for some time.

The same would be true for Europe and Japan, which also import oil and gas. Canadian oil companies would benefit from higher prices, but the country’s economy could slow down due to higher costs at the pump for consumers.

In the current environment, Canada is becoming a more reliable source of oil and gas for Europe and Asia. This situation could lead to serious discussions about the development of Canadian resources and transportation infrastructure.

Reaction of central banks

The primary role of central banks around the world is to use monetary policy to ensure price stability by setting a policy interest rate. Under normal circumstances, the target is an annual price increase of 2%. In the case of the U.S. Federal Reserve (Fed), full employment is also part of its mandate.

An increase in energy prices will be reflected in the inflation rate, which could lead to rate hikes if the situation persists. The most likely scenario would be a postponement of these hikes and acceptance of temporarily higher inflation so as not to harm the economy.

Market reaction

Historically, conflicts have triggered immediate declines in stock market indices, but over a period of several months, these indices recover and start to rise again. The most recent example is Russia’s invasion of Ukraine, which has also had an impact on energy prices, mainly in Europe.

Our tactical positioning

At our last meeting in mid-February, we reduced the weighting of equities and increased that of Canadian bonds. This decision was made before hostilities broke out because all of the indicators analyzed called for a reduction in this asset class. We continue to monitor the rapidly evolving situation, while avoiding overreacting to the constant flow of information.

Staying the course

The current economic climate underscores the importance of diversifying investment portfolios. The rapid pace and unpredictability of events also demonstrate the need to remain vigilant, whether during periods of geopolitical calm and confidence or during episodes of instability such as those we are currently experiencing. The situation unfolding before us will continue to evolve, and it could be some time before the conflict subsides or is resolved.

Keep in mind that hasty decisions could affect the value of your long-term investment portfolio. Also, be aware that financial markets can experience many ups and downs, sometimes contrary to general expectations. Your investment managers play a key role in interpreting these movements while adhering to the established long-term strategy.