The US and Iran exchanged strikes again. Markets are not prepared for what comes next.

Eight days after the memorandum of understanding (MoU) was signed at Versailles, the US and Iran were exchanging strikes — missiles, drones, and a second wave of US bombing. By Sunday evening, both sides had agreed to stand down. Prior to this, markets had already concluded the war was over. Oil prices had fallen dramatically as traffic through the Strait of Hormuz gradually resumed. Global benchmark Brent crude briefly dipped below USD 72 a barrel — the price it traded at the day before US and Israeli strikes on Iran on 28 February.

With energy prices retreating, investors concluded that inflation was heading lower — and that the Fed could afford to wait before raising rates further. We think that conclusion is premature — and the escalation is only part of the reason why.

What happened?

The first sign that the deal was already under strain came on 23 June, when the UN announced two new evacuation routes for stranded ships through Iranian and Omani waters — without consulting Tehran. Iran rejected the plan outright.

Two days later, the Ever Lovely, a Singapore-flagged vessel using the Oman-backed southern corridor, was struck off the Omani coast by a suspected Iranian drone. No crew were injured, but the message was unambiguous: Iran was enforcing its own routing authority, and vessels using corridors it had not approved would bear the consequences.

The US responded on 26 June, striking Iranian missile and drone storage sites and coastal radar positions. Iran retaliated the following day — Iran's Revolutionary Guards Corps (IRGC) claimed strikes on US forces in the region while Bahrain reported drone attacks on its territory and a second tanker was confirmed hit in the strait.

By 28 June, the situation had escalated further. The US launched a second wave of strikes hitting ten Iranian military targets, including Iran's minelaying capabilities — suggesting the mine threat in the central Hormuz channel was not static but growing. Iran responded with ballistic missiles and drones targeting US bases in Bahrain and Kuwait. The IRGC warned the strikes would result in "a complete halt to the process." On Truth Social, Trump posted that "the Islamic Republic of Iran will no longer exist" if the US was forced to act again — language that mirrors the regime-change rhetoric of February, before the war began.

By Sunday evening, both sides had agreed to stand down. Technical talks are scheduled to resume in Doha on Tuesday. Oil prices rose on Monday morning, recovering 0.7% at the time of writing.

Oil prices have fallen since MoU signing. That does not mean the oil problem is solved.

Before Monday's partial recovery, oil prices had already told a different story.

When the ceasefire was announced, markets concluded that Hormuz would fully reopen, supply would normalise, and the energy crisis was effectively over. Brent fell back to pre-war levels as hundreds of stranded vessels cleared the Gulf in a visible surge of outbound supply. But a wave of departing ships is not the same as a functioning strait.

The strait needs both flows — outbound and inbound — to function normally, and while some vessels have begun entering the Gulf to load fresh cargo, the numbers remain a fraction of pre-war levels.  If that recovery stalls — because insurance remains prohibitive, routing authority is contested, and operators are watching the US and Iran exchange strikes — the supply addition the market is pricing simply does not materialise. Prices are likely to adjust upward to reflect that reality.

The reality is that oil doesn't flow the moment a ceasefire is signed — it flows when mines are cleared, insurers are satisfied, and wells are back online. None of those three conditions are fully met.

War risk premiums remain at 2 to 3% of hull value — compared with approximately 0.25% before the conflict, and eight to twelve times that level. The Lloyd's Market Association has said the recovery "is likely to take months." Iran has mined "large segments" of Hormuz, requiring weeks to months of active cooperation to clear. And some of the damage is permanent: Qatar's liquefied natural gas (LNG) facilities lost approximately 17% of export capacity with repair timelines of three to five years, while ADNOC's CEO has said full oil supply recovery is not before mid-2027.

With re-escalation risk still live, costly repairs and restarts are investments producers will defer until the political picture clears. And if negotiations break down entirely — a risk that has grown more real with every strike exchanged since the deal was signed — the question is not whether oil prices adjust upward. It is by how much.

Lower oil prices do not mean lower inflation.

Even if oil prices fall further from here — and we do not think they will — the inflation problem does not go away. Two more waves were already in motion before the first missile was fired, and neither will be resolved by a peace deal.

The first is food. Fertiliser prices surged when Hormuz closed — approximately one third of global fertiliser trade transits the waterway. Farmers who planted this season did so at war-elevated input costs. Some planted less because the economics did not work — meaning less supply is coming to market later this year than would otherwise have been the case. The weather compounds it: the US National Oceanic and Atmospheric Administration confirmed in June that El Niño conditions have formed, with a 63% probability of reaching very strong intensity by year-end. ECB research estimates a strong El Niño raises global food commodity prices by up to 9% at peak — arriving approximately 16 months after the episode begins. That places the worst of it in late 2027. KPMG senior economist Diane Swonk put it plainly: "We've yet to hit the full effects of the war on food prices. The fertiliser, diesel costs, reduced crop yields — none of that hits until the fall harvest and into 2027."

The second is chips. On 25 June — at around the same time US inflation hit a three-year high — Apple raised MacBook prices by up to USD 300 and iPad prices by USD 150. The reason had nothing to do with oil. Memory chip prices have surged as AI data centres absorb enormous quantities of supply, and those costs have now reached the consumer. What makes this wave different is that it has nothing to do with the Middle East. The chip shortage is structural — AI data centres are consuming memory faster than the industry can build capacity to replace it. Oil at USD 72 does not open a single new fabrication plant or deliver a single additional wafer.

Minneapolis Fed President Neel Kashkari was pencilling in a rate cut as recently as March. On 26 June, he announced he had revised his call to a rate hike by year-end. He cited fertiliser disruption from Hormuz and AI data centre investment causing prices to "skyrocket in anything that touches those sectors" — two of the three waves this article describes.

The Bank for International Settlements warned in its 28 June annual report that "more frequent supply disruptions could cause higher inflation expectations to become entrenched among households and businesses" — naming the same structural dynamic this article describes. Its general manager called on policymakers to "act now," warning that "delay will only make the necessary adjustments more costly."

Even if energy prices come down, the inflation problem is not solved.

What does this mean for your portfolio?

The three inflation waves we have described are not going away because both sides agreed to stand down. With central banks around the world signalling that rates are likely to rise further, the case for repositioning your portfolio has not changed. But none of that is a reason to sell everything.

In 2022, the Fed's most aggressive hiking cycle in four decades drove the S&P 500 down 18.1%. The two years that followed delivered back-to-back returns of 26.3% and 25.0% — one of the strongest recoveries on record. More recently, stock markets rebounded strongly in April even as the war continued.

Uncertainty is not the signal to exit. It is the signal to make sure you own the right things.

First, reduce the rate sensitivity of your portfolio.

Three inflation waves are running, the Fed is signalling hikes, and central banks around the world are moving in the same direction. That is not an environment that is kind to assets whose valuations depend on low interest rates. Loss-making technology companies, real estate investment trusts (REITs), and high-multiple growth stocks are the most vulnerable — their valuations rest on distant future cash flows that become less attractive as rates rise. High-quality technology names with strong balance sheets and resilient earnings are a different story. The distinction matters: it is not about avoiding technology, it is about owning the part of it that does not need cheap money to justify its price. Rotate toward quality. Rotate away from the names where the valuation is an act of faith in a low-rate world that is not coming back.

For fixed income, short-duration bonds are not the place to hide — they are the place to invest. When rates are rising, long-duration bonds suffer as their prices fall with every upward move in yields. Short-duration bonds mature quickly and return capital that can be reinvested at the prevailing — and rising — rate.

Second, stay overweight Asia.

The case for Asia has never been about Hormuz — and the escalation does not change it. When global markets are at or near all-time highs, the first thing to look at is valuations — and the first place to look for opportunities is Asia. You are getting comparable earnings growth at a steep discount. At 13.3x forward earnings, Asian equities are not pricing in perfection. The S&P 500 at 21.4x is.

Taiwan grew 14.6% in Q1 2026, Singapore 6.0%, and Japan's semiconductor exports rose 61.2% year-on-year — all with the strait closed. Samsung's Q1 operating profit grew more than eightfold; SK Hynix posted a 72% operating margin, an all-time record. These are real earnings from real deliveries, not projections that depend on a peaceful world.

Within Asia, we believe the AI trade is still intact. The best way to express it is through the Global X Asia Semiconductor ETF (HKEX: 3119), which captures the full Asian semiconductor supply chain at a fraction of the valuation of its US peers. Beyond semiconductors, China and Singapore remain among our highest-conviction ideas — markets where the structural case has strengthened, not weakened, through this crisis. The case for Asia is stronger today than it was before the war. The valuation gap makes it one of the most compelling opportunities in global markets right now.

Third, keep your regular savings plans running.

A regular savings plan — same amount, every month, through the noise — works regardless of how the next few weeks play out. The investors who benefit most from the recovery are the ones who stayed invested in the right places through the uncertainty. You do not need to predict what happens next. You just need to make sure you are positioned to benefit when it does.

Table 1: Recommended Products

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in iShares Hang Seng Tech ETF and Global X Asia Semiconductor ETF.