Published 04/28/2026
Two months after the start of the Middle East crisis, Capital Economics released an asset allocation update addressing three key questions regarding how financial markets have reacted to the ongoing disruption and what may lie ahead.
According to Thomas Mathews, Head of Markets at Capital Economics for Asia-Pacific, the first issue concerns the apparent resilience of equity markets. Despite oil prices remaining around 50% above pre-conflict levels, the MSCI All Country World Index is still slightly above where it stood before the war began.
However, Mathews warns that these headline figures may be misleading. He notes that the recent surge in technology stocks has provided uneven support to the broader market, while most other sectors and regions, particularly those less exposed to technology, remain below pre-crisis levels.
Capital Economics cautions that if evidence grows showing that the conflict is negatively impacting corporate earnings, equity markets could experience more significant declines. In an adverse scenario, projections suggest the S&P 500 could move toward the 6,000 level by year-end.
The second issue highlighted relates to bond markets, where the firm expects more lasting effects. Capital Economics believes that both the Federal Reserve and the Bank of England may maintain a cautious stance, potentially delaying rate cuts as the war continues to influence monetary policy outlooks.
The third issue focuses on the performance of the US dollar relative to other currencies. Despite global volatility, the dollar has shown resilience against both commodity currencies and traditional safe-haven assets.
The firm noted that currencies such as the Swiss franc and Japanese yen have underperformed during the conflict, partly due to their countries’ reliance on energy imports and shifts in relative yields. Nevertheless, their structural safe-haven characteristics remain intact.
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