The US and Israel's military offensive against Iran is already influencing financial markets, though analysts caution against expecting markets to accurately reflect the war's true economic impact. Financial Times notes markets often disappoint by failing to mirror geopolitical views and are poor at discounting future risks. Iran's strategy of prolonging the conflict raises significant concerns. Inflation emerges as the decisive factor, potentially derailing the Federal Reserve's rate-cut plans and pressuring both stock and bond prices. Rising oil prices are central to this risk, driven by fears over the Strait of Hormuz and potential damage to regional infrastructure.

While a full closure of the strait is seen as unlikely, sustained high prices could push inflation higher, increasing bond yields and creating headwinds for equities. The conflict acts as an amplifier for existing economic risks rather than a new one.