Yale's Stephen Roach: Markets are in danger of being 'whipsawed' by Middle East conflict, U.S. unemployment

Markets are in danger of being "whipsawed" by the combination of regional conflict in the Middle East and rising unemployment in the United States, says Stephen Roach, senior fellow at Yale Law School's Paul Tsai China Center.

The conflict in the Middle East escalated on Tuesday, with Iran launching a ballistic missile attack on Israel after its killing of Hezbollah leader Hassan Nasrallah and an Iranian commander in Lebanon.

Most Asian markets fell on Wednesday, tracking losses on Wall Street overnight, as investors fretted over rising tensions in the Middle East.

"The markets really will not know where to turn," Roach said, adding that conflicts in the Middle East are adding to inflationary risks at a time when global central banks are starting to ease monetary policy.

"We are likely to see significant increases in volatility and markets that really are whipped back and forth dramatically," Roach told CNBC's "Squawk Box Asia" on Wednesday.

The Israel Defense Forces said its troops had started launching new strikes against Hezbollah targets in Lebanon in response to Iran's missile attack Tuesday night.

It remains to be seen whether there will be lasting effects on inflation, said Stephen Stanley, chief economist at Santander, adding that the oil market will be "affected more significantly" if the tension escalates.

Iran is the third-largest producer among the Organization of the Petroleum Exporting Countries, pumping out nearly four million barrels of oil per day, according to the Energy Information Administration. Oil prices had jumped over 5% after the missile strike before tapering to a 2% climb.

Whether the markets' risk-off move will persist longer hangs on several key factors, one being the Israeli response to Iran's