Market implications of three scenarios for the conflict

Growing optimism that the conflict in the Middle East will be severe but short-lived has been accompanied over the past 24 hours by some retreat in the price of oil and a partial unwinding of the big moves in bonds, equities and currencies after the conflict began. But while that optimism seems consistent with a start of the first and most benign of the three broad scenarios that we outline here, the most malign of the three scenarios could result in renewed turmoil in commodity and financial markets. Past conflict-related surges in energy prices also help to shed light on what might happen in different circumstances.