Stocks Slide as Lagarde Warns Markets Underestimate Iran Shock

European and global equity markets moved lower on Friday as investors reassessed the economic fallout from the ongoing Iran conflict, with sentiment turning cautious despite a temporary pause in US strikes. The pan-European Stoxx 600 fell 1.14%, while Germany’s DAX dropped 1.33% and France’s CAC 40 declined 0.82%, reflecting broad-based risk aversion across the region.

The weakness extended globally. Asian markets closed mostly lower, led by declines in South Korea and India, while Wall Street had already set a negative tone in the prior session, with the Nasdaq sliding 2.4% and the S&P 500 falling 1.7%.

At the center of the shift in sentiment was a stark warning from Christine Lagarde, who cautioned that markets may be underestimating the scale and duration of the economic shock. She described the situation as “beyond what we can imagine,” highlighting that damage to energy infrastructure could take years to normalize and that second-order effects—particularly in supply chains—are only beginning to emerge.

Oil prices continued to climb, reinforcing inflation concerns. Brent crude traded above $110 per barrel, while US crude approached $96, as disruptions in the Strait of Hormuz—through which a significant share of global oil flows—persisted.

Scenario analysis from UBS underscores the range of potential outcomes. A short-lived disruption would likely result in only a temporary price spike, but a prolonged interruption to shipping could push oil toward $120, while a more severe scenario could see prices surge to $150 per barrel. In such a case, inflation in both Europe and the US could rise above 3.5%, with measurable impacts on economic growth.

Markets are also beginning to price in broader supply chain risks beyond energy. Lagarde pointed to helium—critical for semiconductor manufacturing—as one example of a commodity whose disruption has yet to be fully reflected in prices, suggesting that inflationary pressures may be more persistent and widespread than currently anticipated.

Safe-haven demand strengthened accordingly, with gold rising 1.3% and silver gaining over 2%, while bond yields moved higher as investors adjusted expectations for inflation and central bank policy.

Market Outlook

Markets remain caught between geopolitical uncertainty and incomplete pricing of second-order economic effects. While a near-term de-escalation could stabilize sentiment, the risk of prolonged disruption to energy flows and supply chains suggests that volatility is likely to persist. Elevated oil prices will remain a key driver, with inflation expectations and central bank responses shaping market direction. Investors should expect further downside risk in equities if conflict escalates, while commodities and safe-haven assets may remain supported in the near term.