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2 Mar 2026 | 3 minutes to read
After weeks of speculation, the US and Israel jointly targeted Iran over the weekend. The operation continues. Iran has closed the Strait of Hormuz through which around 20% of global seaborne oil and LNG supplies are routed. Oil prices have spiked by around 9% on the news, the dollar has strengthened a little against other major currencies, and a commonly-tracked measure of equity market volatility – the VIX – has risen. Gold is up around 2%. We don’t know how long this conflict may last or understand the full degree to which it might be contained or spread throughout the Middle East. If sustained, higher oil prices, re-routing freight and supply chain disruption across the region may all feed into inflation, at the margin. The Organisation of the Petroleum Exporting Countries and its allies (OPEC+) – of which Iran is a member – announced it will increase oil production by 206,000 barrels per day from April, aiming to offset potential supply disruptions. Although there is a risk this conflagration develops, typically such conflicts – beyond the tragic humanitarian loss – tend to have limited long-term impacts on financial markets. Major equity markets are currently down between 1% and 2.5%. We are monitoring developments closely.
Before this military action, last week markets largely shrugged off AI jitters despite mixed signals. New research or opinion pieces – however flimsy – seem to suggest AI poses existential threats to one business or another on an almost weekly basis. While IBM saw its worst one-day share price fall in over 25 years, sliding –13%, over fears a new large language model could replicate data processing coding, the world’s most valuable publicly-traded company, chip designer Nvidia, reported a $215bn revenue bonanza for last year, and no let-up in demand. Elsewhere, ratings agency Moody’s warned that some $662bn of accounting risk is tied to building big tech’s new datacentres, with reports that even infrastructure still under construction may be rated to allow banks to shift credit risk to a wider pool of investors.
AI is still adolescent: promising much, but yet to widely prove itself. No doubt something structurally significant is underway. But expect volatility to continue as investors look again at companies through a somewhat hazy AI lens. Elsewhere, away from big US tech, HSBC’s solid earnings helped push the FTSE 100 to another all-time high, nearing 11,000.
Forecasts of falling inflation and modest GDP growth helped push UK government borrowing costs to a one-year low of around 4.23% last week. Relative political calm after the last Budget has also helped, now businesses have had time to digest employer national insurance and minimum wage increases introduced in April 2025. With headline yields for low-risk bonds such as gilts still relatively attractive, they offer investors a buffer amidst wider geo-political uncertainty.
Nevertheless, there’s no shortage of potential political flashpoints ahead. Last week’s by-election fallout could be followed by challenging local elections in May. A particularly bad result for Labour could endanger Keir Starmer’s position as party leader. Concerns over leadership stability and policy continuity may cause gilt yields to rise again if investors demand a political risk premium to lend to the government. A new prime minister would likely mean a new chancellor. And if the new leadership is less committed to fiscal discipline, that might herald more borrowing.
The Treasury will be hoping Labour’s recent by-election loss doesn’t overshadow this week’s Spring Forecast. All else being equal, lower gilt yields should increase fiscal headroom, underscoring the improvement in public finances reported for January due to higher tax receipts. Although political pressure for additional spending persists, the fiscal update this week is likely to be relatively uneventful.
Confusion now reigns after the US Supreme Court overruled President Trump’s attempt to use emergency economic powers to impose tariffs. More than 1,800 companies last week reportedly began legal action against the administration’s tariff regime in order to refund all duties with interest, totalling some $130bn. Among the plaintiffs, FedEx announced it would reimburse shippers and consumers who originally paid these charges. During his State of the Union address, Trump listed many other legal tools he can use to impose tariffs. He has currently invoked Section 122 allowing him to immediately impose tariffs of up to 15% for up to 150 days without the consent of Congress.
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