What began as a targeted air campaign has rapidly escalated into the defining market event of 2026. Operation Epic Fury, the joint US-Israeli military action against Iran, has entered its second week with no credible diplomatic off-ramp in sight. The Strait of Hormuz — through which roughly 20% of global oil and LNG transits — has been effectively shut for nine days, with tanker traffic at zero and insurers refusing to cover passage. Brent crude surged 36% over the week, its largest weekly gain ever, closing Friday at $93 before gapping above $108 on Sunday. WTI posted its biggest weekly gain on record, rising 36%.

The supply disruption is broadening. Iraq has shut 1.5 million barrels per day of production and Kuwait is cutting output, with JPMorgan warning that total shut-ins could reach 6 million bpd in the coming week. Qatar shuttered a major LNG export facility following a drone strike and has begun winding down aluminium production, sending European gas prices up 38% on the week and the metal spiking. The Middle East supplies around 9% of global aluminium.

The conflict intensified further when Hezbollah opened a second front from Lebanon and Azerbaijan was drawn into the fighting. Iran's retaliatory capacity is degrading under sustained strikes on its oil infrastructure, but the installation of Mojtaba Khamenei as Supreme Leader on 8 March, with the IRGC pledging allegiance, signals institutional consolidation rather than collapse. Trump's demand for "unconditional surrender" has effectively killed the diplomatic path, at least for now.

For central banks, the energy shock presents a classic stagflationary dilemma. Rate cut expectations have been repriced sharply: the Fed is now priced for 50 basis points of easing this year, down from 60 before the conflict, while UK expectations have dropped from 52 to 38 basis points. The US ISM manufacturing prices index spiked from 59 to 70.5 in February even before the conflict, and sustained energy costs will only compound those pressures. At a minimum, central banks will be forced to wait and see, with the risk that both growth and inflation deteriorate simultaneously.

Australian shares suffered their worst week since early 2022. The February reporting season had delivered the strongest ratio of beats to misses in some time, with big banks benefiting from robust credit growth and miners lifted by surging commodity prices. But the late-week selloff in mining stocks as energy prices spiked and China set its weakest growth target since 1991 (4.5–5%) undermined the positive earnings backdrop. Some discretionary retailers also reported softer demand, hinting that the changed rates outlook in Australia is already weighing on consumers. RBA Governor Bullock described the March meeting as "live," adding further uncertainty for local markets.

Energy stocks were the clear winner, with Woodside rallying on the prospect of materially stronger cashflows. Gold pushed toward $5,400 as investors sought havens, while the Australian dollar fell to around 62 US cents as risk appetite evaporated.

The oil futures curve still implies a return toward $70–78 by September, suggesting markets expect a resolution within months. But every day the Strait of Hormuz remains closed, the tail risks grow. The week ahead hinges on whether Brent can hold above $100, any signals of even partial Hormuz reopening, and the new Iranian Supreme Leader's first substantive moves.