Navigating Uncertainty: Q2/2026 market outlook on Middle East conflicts and energy shocks

The dominant market story of the past month has been impossible to ignore: a sharp escalation in the Middle East conflict, a surge in oil prices and a rapid repricing of inflation and central bank expectations.

What followed felt familiar—yet unsettling. Inflation fears resurfaced, rate-cut hopes were pushed back and markets were forced to reassess a fragile macro equilibrium.

But amid the noise, not everyone panicked.

While many investors scrambled to react, Coxon’s approach here was notably disciplined: no emotional trading, no sudden pivots.

Positioning going into the conflict already reflected a constructive view on commodities, he says, ‘models were bullish on both copper and oil—an advantage as energy markets took off’.

There were adjustments, but they were measured:

1. Gold exposure had already been trimmed from 8% to 5%
2. Portfolios had rotated toward value
3. The focus remained firmly on long-term strategy, not short-term headlines

The message is simple but often overlooked: don’t trade the shock: trade the trajectory.

Trying to predict the exact path of the Middle East conflict is a losing game. But understanding the incentives around it is more useful.

This conflict was initiated by Israel and ultimately, the decision to de-escalate also lies there. Meanwhile, Iran looks decided to fight back ultimatum with ultimatum. A full regime change scenario looks unlikely, suggesting limits to how far this can escalate structurally.

More importantly, the political overlay matters.

In the US, any sustained spike in inflation would take roughly 3 to 6 months to filter through to consumers. That timing is critical, it would hit just ahead of a key political milestone: US midterm elections due November, warns Coxon.

In other words, while geopolitics may feel open-ended, the economic timeline is not.

So how do you invest when the headlines are this loud?

The key is to separate the event from its consequences. 

If bond yields begin to ease again, oil prices stabilize, and inflation expectations cool, the broader market narrative quickly shifts back toward risk assets.

Under that scenario, equities remain on track for further gains.

This is why the focus remains on the 3–6 month transmission window, not the daily volatility.

The Gulf region has faced similar shocks before, most notably during the Gulf War. When Iraq invaded Kuwait in August 1990, oil prices jumped from around $15 per barrel to nearly $40 in just two months—a staggering spike that rattled markets worldwide.

Yet the spike was short-lived. By the time the coalition forces intervened and the war ended in February 1991, oil prices had already started to moderate.

Looking at market behavior:

• 1 month later: volatility remained elevated
• 3 to 6 months later: stabilization began; the energy market had largely returned to pre-war levels.
• 1 year later: markets had largely returned to pre-war trends. Global markets had absorbed the shock, with equities and commodities resuming their previous trends.

The lesson is clear: short-term volatility doesn’t necessarily signal a permanent change. History shows that even dramatic geopolitical shocks tend to produce spikes rather than sustained shifts—something investors today would do well to remember as they navigate the current Middle East tensions.

While geopolitics dominated headlines, another risk quietly built beneath the surface: stress in private credit markets. Most credit stress was linked to a major selloff in software companies on fear that AI models and applications could wipe out their business models.

Some have drawn parallels with the Global Financial Crisis—but the dynamics are different.

AI risks differentiate potential winners from losers but won’t weaken every company’s business model. Companies that have proprietary data, business models deeply embedded in corporate clients will emerge as winners as their services cannot be replaced by AI-made software only. LSEG, Bloomberg are good examples. AI can build platforms but cannot invent data. On the contrary, AI will help improve services. So, companies with large entreprise clientbook, proprietary data, flexibility to integrate AI into existing products and high recurring revenue are better positioned in the changing digital services environment.

Private credit has thrived on the promise of steady, high single-digit returns. But when uncertainty rises and investors want their money back, a structural problem emerges: the cash simply isn’t there.

Even without widespread defaults, redemption pressure alone can destabilize the system:

1. Withdrawal requests are rising
2. Buyers are scarce
3. Illiquidity amplifies the stress

The concern is compounded by exposure sitting within parts of the banking system.

Good news is that the redemption limits could help contain a rapid meltdown, bad news is that this could be a slow-burning risk that could linger for quarters.

Q1 delivered a toxic mix:

• Geopolitical uncertainty (Venezuela, Greenland, Middle East)
• Rising energy prices
• Higher inflation expectations
• Hawkish central bank repricing
• Slowing US growth
• Weak European momentum

It’s no surprise the “stagflation” word started creeping back into conversations.

But the reality is more nuanced.

We are not yet in stagflation—but we are in a late-cycle environment where shocks matter more.

And that makes central banks’ next moves even more critical.

Dollar strength and its limits

The US dollar and oil have been the clear winners of the recent Middle East conflict that led to a global energy crisis.

But the policy backdrop matters.

The Federal Reserve (Fed) still operates under a dual mandate – inflation and labour market, giving it more flexibility than peers like the European Central Bank or the Bank of England that have a single mandate: price stability.

This is why, despite the inflation shock, the latest dot plot from the Fed signaled a rate cut this year.

That puts it in a less hawkish position relative to Europe.

In markets, investors priced out the possibility of a Fed cut, but ramped up the chance of rate hikes in Europe.

Europe faces a double hit:

1. Rising energy prices
2. A stronger dollar

Both fuel the inflation expectations and the chances of European Central Bank (ECB) and Bank of England (BoE) policy tightening.

Unfortunately, even aggressive repricing of rate expectations hasn’t helped the euro and sterling much against a broad-based USD appreciation.

This is normal: central bank policies will be partly effective faced with an external shock. Policymakers must slow down economic growth to tame inflationary pressures and the latter is unappetizing for currencies.

As such, the near-term outlook remains fragile:

• Europe is structurally more exposed to energy shocks
• Growth remains weak
• Positioning has already turned bearish

But when Middle East dust settles, interest rate differentials could stabilize the euro, sterling, force the US dollar to retrace war-backed gains.

The Swiss National Bank (SNB) is in a unique position.

Rates are at 0%, inflation is near zero—yet the Swiss franc remains strong due to safe-haven demand.

The challenge isn’t the level of the currency, but the speed of its appreciation. The SNB has the luxury to wait until more clarity in the Middle East.

But managing strong franc—possibly against the euro—remains a delicate balancing act.

Gold’s underperformance during a geopolitical crisis raised eyebrows.

But the explanation is straightforward:

• Strong dollar
• Rising real yields
• Weak yen

All three are negative for gold.

As real yields rise, the opportunity cost of holding gold increases.

The trend has weakened—and models suggest gold allocations could fall further, says Glenn Coxon.

In an inflationary environment, the playbook shifts.

Investors look for:

• Hard assets
• The US dollar
• Inflation-linked securities

Oil and copper remain well supported within that framework—classic inflation hedges back in demand as macro uncertainty rises.

Energy, defence and cybersecurity stocks are among the major winners of geopolitical tensions.

One of the more intriguing developments has been Bitcoin’s resilience to war stress.

During the Middle East crisis, the cryptocurrency showed low correlation with traditional risk assets, including tech.

That’s notable.

It’s not a full regime shift yet—but it suggests Bitcoin may be evolving in how investors perceive it.

Glenn Coxon turns less bearish on the back of the recent performance, but prefers waiting.

Looking ahead, positioning reflects a cautiously constructive outlook—assuming tensions ease and inflation pressures moderate.

Coxon likes:

• Emerging Markets
  A cooling in rates and geopolitics would be a strong tailwind.
• Commodities
  Still supported in an inflation-sensitive environment.

The content in this article is provided for educational purposes only. It does not constitute investment advise, financial recommendations, or promotional material.