The breakdown of the Middle East ceasefire, announced by US President Donald Trump, sent shockwaves through global energy markets. Oil prices jumped roughly $6 on the morning of 8 July, highlighting how quickly geopolitical tensions can reshape investor sentiment.
This collapse, involving volatile actors like president Trump, Iran and Israel, highlighted the persistent geopolitical risks surrounding the Strait of Hormuz, where an attack on three commercial vessels, including one Qatari LNG tanker, suggested Tehran was seeking to reassert control over vital energy corridors.
As the global economy continues to accelerate, these disruptions serve as a stark reminder that the energy cycle remains tethered to a region where “jockeying for position” is a regular feature of diplomacy, said Paul Jackson, global head of asset allocation research at Invesco.
Geopolitical tensions reignite oil volatility
The breakdown of the recent memorandum of understanding is not entirely surprising, as the agreement involves several highly volatile actors. Despite a period of national mourning in Iran, recent attacks on shipping vessels in the Gulf suggested a deliberate effort to signal that Tehran remains in control of the Strait of Hormuz regardless of any signed agreements, argued Jackson in an interview on 8 July 2026.
While oil prices had recently receded to pre-war levels, the combination of renewed conflict and a diversifying supply chain, including the United Arab Emirates' departure from OPEC+, could increase supply competition within global oil markets. Nevertheless, he expects a growing global economy to absorb excess supply, potentially pushing prices back into the $80 to $90 range.
The global race for energy security
Frequent disruptions in the Middle East and the Russia-Ukraine conflict have prioritised energy security for national governments. This shift is accelerating the decarbonisation of economies, as security is increasingly defined by the ability to control domestic energy requirements through renewables and nuclear power.
In the UK, for instance, there has already been a 30% jump in demand for residential solar panels. Jackson stressed that this transition is particularly critical for Asia, with Japan relying on the Middle East for 30% of its primary energy, making it far more vulnerable to the closure of the Strait of Hormuz than Europe.
Central banks face renewed inflation risks
Rising energy prices also complicate the outlook for central banks, particularly as inflation remains stubborn. The Federal Reserve faces a challenging second half of the year as core inflation, specifically the Core PCE, the Fed's preferred measure of underlying inflation, has been trending upwards since October. Although headline inflation typically tracks oil prices, the resilience of the labour market and rising wage growth present a more persistent problem for policymakers.
The window of opportunity for the Fed to cut rates three times, as expected at the beginning this year by Invesco and the market, appears to have closed, leaving interest rates likely on hold for a significant period.
Besides, rising US debt issuance plus quantitative tightening should push long-term yields higher, raising Treasury funding costs. While central bank balance sheets remain oversized, unlike past crises, Jackson noted that they are now shrinking them rather than waiting decades for GDP growth to reduce their relative size, adding upward pressure on yields.
Meanwhile, the ECB’s recent decision to raise rates by 25 basis points was a reaction to temporary headline inflation spikes while the services sector—looking at the PMI—was actually deteriorating.
Jackson estimated the Fed’s neutral rate at 3.5–4%, higher than the Fed’s 3% view, suggesting policy is loose. For the ECB, he sees neutral near 3%. While recent hikes moved rates toward neutral, he cautions that further increases could move into policy error territory.
AI: A ripple rather than a tsunami
While there is significant excitement surrounding artificial intelligence, its actual impact on GDP growth may be overstated in the current cycle. In the US, fixed investment related to AI contributes roughly 0.5% to growth, but it is not the dominating force many suggest.
The AI phenomenon has moved through waves: first with “enablers” like hyperscalers, then through semiconductor manufacturers in Taiwan and South Korea. For AI to become a true technological revolution, it must eventually deliver broad productivity growth that allows inflation to fall; otherwise, the massive capital investments made by hyperscalers may fail to prove profitable.
Seeking value in cyclical markets
Current market conditions underscore the vital importance of diversification over chasing the “latest craze", such as the now-deflating Bitcoin bubble or mega-cap US tech stocks, emphasised Jackson. He argued that investors are increasingly seeking cyclicality, which is currently more abundant in non-US markets, including Europe, the UK, Japan, and China.
While the “Magnificent 7” have disappointed, the Russell 2000 has shown significant outperformance, suggesting a rotation toward smaller and more cyclical firms. Opportunities remain in industrials, financials, and resource-related sectors like metals and mining, especially as Germany pivots toward fiscal expansion to stimulate its economy.
For Jackson, the investment backdrop remains defined by geopolitical uncertainty, persistent inflation risks and shifting market leadership. Rather than chasing the latest market trend, investors should focus on diversification and sectors positioned to benefit from the next phase of the economic cycle.
