US-Israel strikes killed Iranian Supreme Leader Ayatollah Ali Khamenei on Saturday, sowing chaos as Iran struck back at Gulf cities, airlines halted flights and tankers carrying oil and other products suspended transit through the key Strait of Hormuz.
The first risk for financial markets is the uncertainty over what happens next in Iran, given the complexities of the Islamic Republic's ruling system, the ideological nature of its support base, and the power of its Revolutionary Guards.
That then complicates the outlook for oil prices, which have been rising for weeks but are now hostage to what oil-producing countries do, and how passage of tankers through the Middle East is affected.
There are big implications for inflation worldwide and even the safety of bonds, a traditional investment haven in times of stress.
"Middle East tail risks have increased," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.
"Markets will reprice from geopolitical shock to regime risk shock, prolonged conflict, not just retaliation, unless Iran says it wants to negotiate."
A bigger risk, analysts say, is complacency in markets that have assumed the fallout will be limited - similar to last June's "12-Day War" in Iran or during Russia's numerous attacks on Ukraine - and have been dismissive of any comparisons to Iran's 1979 regime change.
Brent crude jumped around eight per cent on Monday for a gain of nearly 30 per cent so far this year.
Investors are purchasing US Treasuries and gold as hedges for a variety of risks, including Middle East tensions and US President Donald Trump's erratic policies.
Gold had a record run last year and is up 24 per cent so far in 2026. In comparison, the main US stock index is up just 0.5 per cent.
"History argues strongly in favour of selling geopolitical risk premium when hostilities start," Barclays analysts said in a client note.
"What worries us is that investors have now learned this pattern and might be underpricing a scenario where containment fails."
William Jackson, chief emerging markets economist at Capital Economics, expects a prolonged conflict affecting supply could cause oil prices to jump to around $US100 ($A141), potentially adding 0.6-0.7 percentage points to global inflation.
Tariq Dennison, a wealth adviser at Zurich-based GFM Asset Management, said the markets had already been underestimating inflation threats.
"There will be more impact on Europe than the US, given the closer proximity of Hormuz oil and gas post-Russia," he said.
"Maybe a slight short-term uptick on gold, but gold has already priced in maximum geopolitical uncertainty."
On the other hand, some analysts expect Iran will not be able to disrupt trade in the Gulf region and the impact on oil prices will be contained.
"We wouldn't be surprised if any selloff in the (US) S&P500 on Monday morning (US time) turns into a rally, driven by expectations of lower oil prices once the latest Middle East war ends," said Ed Yardeni, president of New York-based Yardeni Research.
