The U.S.-Israeli war with Iran prompted a sharp reversal in regional equity market performance, with U.S. equities outperforming amid safe-haven flows.
Earlier this year, investors had been betting on a Eurozone recovery, but with no recovery in sight, Eurozone equities appear relatively expensive. Supply chain professionals should expect the reversal in regional performance to persist over the medium term, with the Middle East conflict having a lasting impact on Eurozone equities, according to recent data released by Oxford Economies.
Key takeaways:
· Europe is highly vulnerable to the energy price shock given its position as a net energy importer, particularly of natural gas. While the Eurozone has made efforts to diversify supplies from Russia, it remains dependent on gas imports.
· Disruption to cargo flows from the Gulf to Asia will likely force these buyers to secure alternative liquified natural gas sources, namely the United States, by turning to the spot market, bidding up prices and adding to the supply shock.
· This will become a bigger issue if the war continues through spring and European gas storage needs to be refilled. Gas storage levels are already at 25%, below the 25th percentile since 2011.
· Meanwhile, the Eurozone entered this shock in a frail position, with pre-conflict forecasts below consensus. Since 2022, earnings growth for Eurozone equities has been minimal, owing to the prior energy shock, intensifying competition with China, and a stronger euro in the past year. Manufacturing, especially German industrial production, slowed into 2026. Energy-intensive industries, a significant part of the Eurozone index, posed a major drag
· Despite decelerating GDP growth, expect the ECB to prioritize fighting inflation by raising rates twice in June and July. This presents a challenging backdrop for EUR HY credit, with corporates contending with weaker demand, increased refinancing costs, and rising input costs, increasing default risk.
· Markets are beginning to reflect this, with as EUR HY credit spreads widened last week relative to USD HY, though a partial reversal over the last two days has occurred. The spread has further room to run. Unlike the Eurozone, the United States entered this shock from a position of relative strength given its position as a net energy exporter. With robust pre-conflict GDP momentum and a cyclical productivity upturn which provides a meaningful cushion to corporate margins, the U.S. position contrast sharply with the Eurozone's vulnerability.
