(Kitco Commentary) - A prediction from Italian Prime Minister Giorgia Meloni that 2026 could be worse than 2025 is starting to look accurate, at least geopolitically.
Starting with the Russia–Ukraine conflict, diplomacy seems to have been pushed back. Ukraine continues attacks on Russian oil refineries and is threatening to widen the scope of its operations, while Moscow has told foreign citizens and diplomats in Kyiv to leave the city amid potential new attacks on the capital.
No wonder Russian markets remain subdued, even as high oil prices continue to support the country’s budget.
If tensions continue to rise, European defense stocks such as Rheinmetall or Thales could see another leg higher. However, if these latest warnings once again prove to be more rhetoric than action, the upside for the sector may remain limited.
In the Middle East, the situation is far from calm either. The United States, “in self-defense,” attacked Iranian targets near Bandar Abbas, destroying two mine-laying vessels and an air defense missile site.
Oil prices did not spike on the news, but the recent correction following statements by U.S. officials that the agreement between the two sides was “95% complete” appears to have stalled. Still, judging by the muted reaction of the S&P 500, Dow Jones, and NASDAQ indices, the markets continue to price in the success of the negotiations.
As for the likelihood of this happening, the fact that both sides remain fundamentally at odds on key issues — from oversight of Iran’s nuclear program to the reopening of the Strait of Hormuz — suggests that the path to peace is still far from certain, unless one side agrees to terms that are not in its own best interest.
When might the markets finally start to panic?
The head of the International Energy Agency has warned that the global oil market could enter the “red zone” as early as July or August due to peak summer demand, limited additional supply from the Middle East, and falling inventories.
Now, even if the conflict ended tomorrow, the economic impact would not disappear overnight, as restoring production capacity would take time. Thus, inflation would likely remain sticky, meaning central banks would struggle to return to aggressive rate cuts anytime soon.
Therefore, although markets would likely react positively at first, especially gold, beyond that, the situation could resemble 2022, with companies facing higher energy costs and lower profits, and consumer confidence continuing to deteriorate.