The escalating conflict in the Middle East is prompting investors to rethink some of the most popular market bets of 2026, as global equities decline, the U.S. dollar strengthens, and traders scale back expectations for interest-rate cuts by the Federal Reserve.
Chris Turner, head of global markets at ING, said investors had begun the year positioned for stronger growth, and a stagflationary shock had not been part of their outlook. As a result, markets are now adopting a more cautious stance and could still see further unwinding of positions.
One of the most notable shifts has been in currency markets. Investors had built their largest bearish positions on the U.S. dollar since 2021, according to data from the U.S. Commodity Futures Trading Commission, largely due to expectations that the Federal Reserve would begin cutting rates. However, the outbreak of the conflict has driven the dollar to its strongest level since last November as investors move toward safer assets. Ipek Ozkardeskaya, senior analyst at Swissquote, said the U.S. currency has emerged as a major beneficiary of the turmoil, partly because the U.S. economy is less vulnerable to energy shocks.
Global equity markets have also been affected. Shares outside the United States have fallen sharply after strikes involving the U.S. and Israel against Iran. The MSCI World ex-US Index declined markedly, whilst the S&P 500 held up better as investors favoured the U.S. market, given its lower reliance on energy imports. Lale Akoner, global market strategist at eToro, said the conflict has not completely derailed the bullish outlook for equities this year but has made markets far more sensitive to oil prices and interest-rate expectations.
Emerging markets, which had been strong performers earlier in 2026, have also been rattled. Stocks in developing economies had gained more than 15% and emerging market currencies had strengthened earlier in the year, but both indicators declined sharply last week. Goldman Sachs noted that currencies which had previously led gains were among the biggest losers as investors moved to reduce risk exposure, particularly in economies with strong links to Middle Eastern energy flows such as Egypt, United Arab Emirates, and Thailand.
The spike in energy prices has also revived inflation concerns and prompted markets to reassess expectations for monetary policy. Before the conflict began, traders had priced in roughly a 50% chance of a rate cut at the Federal Reserve’s June meeting. That probability has now fallen to about 25%. The energy shock has also led investors to reconsider the policy outlook for other major central banks, including the Bank of England and the European Central Bank.
Banking stocks have also come under pressure as investors evaluate the broader economic impact of disruptions to shipping through the Strait of Hormuz. Higher energy costs have raised concerns that inflation could remain elevated, potentially slowing lending activity and reducing credit demand. Akoner said the key risks to watch are credit spreads and liquidity conditions in private markets, as geopolitical tensions tend to matter most when they translate into tighter financial conditions.
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