The war in the Middle East is driving up costs and rattling financial markets. G7 government bond yields have climbed to around 4.6% on the 10-year, up from 3.2% before the US-Israeli campaign against Iran began on February 28. That's a 140-basis-point jump in three months.
Brent crude hit $111 per barrel by mid-May, a level not seen since the post-Ukraine energy shock. The catalyst: Iran's closure of the Strait of Hormuz, which handles roughly 20% of the world's oil trade.
G7 finance ministers and central bank governors met in Paris from May 19-21. Their joint statement acknowledged the conflict "heightens risks to both economic growth and inflation" but offered no specific solutions. Central banks face a dilemma: inflation is hot due to energy prices, ruling out rate cuts, but growth is slowing, meaning hikes could trigger a recession.
The IMF downgraded its 2026 growth forecast for emerging markets to a baseline of 3.65%, with a worst-case scenario of 2.6% if the war drags on.
US Treasuries now yield 4.6% on the 10-year. But with inflation potentially at 4-5%, the real return is near zero. The IMF has warned that tighter financial conditions could affect non-bank financial entities, signaling potential shadow banking issues.
For crypto, the traditional safe havens aren't working as expected. Bitcoin's narrative as an inflation hedge gains traction, but tighter liquidity could pressure risk assets. Traders should watch G7 central bank moves and the Strait of Hormuz. Any diplomatic reopening would be bullish for global markets.