Investing.com -- Two months into the Middle East crisis, Capital Economics has published an asset allocation update addressing three key questions about how financial markets have responded to the ongoing disruption and what comes next.

In a note headed by Thomas Mathews, Capital Economics head of markets in Asia Pacific, the firm said the first question is why equity markets have recovered at all, with oil prices still roughly 50% above pre-war levels and the MSCI All Country World Index sitting slightly higher than before the conflict began.

Mathews argues the headline figures are misleading, writing that "renewed enthusiasm for 'tech' stocks has provided a big, but patchy, offsetting boost," while most other sectors and less tech-heavy regional indices remain below pre-war levels.

The firm warned that if evidence accumulates of the conflict damaging corporate earnings, "equities could in principle fall a lot further than they had even at their weakest point last month," penciling in an adverse scenario S&P 500 target of around 6,000 for year-end.

The second question concerns bonds, where Capital Economics sees more lasting damage. The firm doubts the Federal Reserve or the Bank of England will cut rates this year, arguing the war has had a durable effect on the monetary policy outlook.

The third question addresses the U.S. dollar's resilience against both commodity currencies and traditional safe havens.

Capital Economics noted that the Swiss franc and Japanese yen have been among the worst-performing currencies over the conflict, partly because both countries are net energy importers and relative yields have shifted against them.

However, the firm stressed that the safe-haven credentials of both currencies remain structurally intact.