Middle East conflict and AI report shake markets

After a month marked by growing unease, geopolitical tensions boiled over in the final days of February. Over the weekend, the US and Israel launched coordinated strikes on Iranian targets. This led to oil prices jumping at the 1 March market open as investors priced in elevated uncertainty and the risk of supply disruptions.

Market impact of geopolitical uncertainties

The market’s immediate focus is the Strait of Hormuz, a vital path for global energy flows. Roughly one-fifth of global oil supply and a significant share of liquefied natural gas shipments pass through this corridor. While the route has not been fully closed, commercial shipping has slowed as vessels face heightened security risks, surging insurance costs, and delays.

Although the initial spike in crude was sharp, the path forward will depend on how much supply is physically disrupted and whether replacement barrels can be sourced. Analysts noted that oil entered this crisis with a degree of oversupply, which may help buffer the shock if disruptions remain contained. Still, markets are bracing for continued volatility, with estimates suggesting an additional risk premium may be priced into crude.

All major equity indices opened lower on Monday 2 March. Early moves reflect a classic risk-off reaction: equities and credit under pressure, while safe-haven assets such as the US dollar and gold strengthen. The broader economic implications hinge on whether disruptions become prolonged and severe, though investors are already preparing for higher near-term inflation due to rising energy costs.

AI-driven market volatility intensifies

February also saw another wave of turbulence triggered by a report from Citrini Research, which presented a hypothetical scenario of a deeply disruptive AI-driven economic cycle by 2028. The paper, widely circulated across trading desks, envisioned mass white collar layoffs, reduced consumer spending, and a negative feedback loop in which companies increasingly replace workers with AI to protect margins. Markets reacted strongly, particularly in sectors most exposed to AI disruption, including software, financial services, and consumer facing platforms.

At the core of the report is a reminder of consumer spending concentration: the top 20% of earners drive roughly two thirds of US consumption. Even a modest decline in white collar employment could have an outsized effect on discretionary demand. The market’s response was visible, with further weakness in the big tech names and investors selling shares in software, payments platforms, and delivery businesses that the report highlighted as vulnerable.

At the same time, investors shifted toward the beneficiaries of AI investment—chipmakers, infrastructure providers, and data‑centre operators. Companies central to semiconductor supply chains, including major Asian manufacturers, reached new highs as capital continued to flow into the physical backbone of AI development.

Not all observers agreed with the report’s grim outlook. Several economists and asset managers publicly criticised the analysis as “science fiction,” noting limited real-world evidence of widespread AI-driven labour displacement today. 

With the episode highlighting how sensitive markets remain to the AI-related narrative, diversification is becoming increasingly important – both across geographies and sectors with different capital intensity profiles. Companies with heavy physical assets and low obsolescence, such as utilities and semiconductors, appear relatively better insulated from rapid technological disruption.

Looking ahead

Markets are likely to remain sensitive to geopolitical developments and AI-related narratives. The conflict in the Middle East will continue to influence energy prices and investor sentiment until clearer signs of de-escalation emerge. Even if oil supply disruptions remain contained, elevated uncertainty alone may keep risk assets under pressure and safe haven flows intact.