Iran war update

The Iran war has entered its second week. The Iranian regime has selected a new Supreme Leader: Mojtaba Khamenei, the son of Ali Khamenei, who lost his father, wife and children in the first wave of attacks and is considered a hardliner. The conflict has spread throughout the Middle East and, to varying degrees, is drawing in Iran’s proxies, and allies of the US and Israel. The humanitarian impact is rising. Our thoughts remain, first and foremost, with all those affected in the region and beyond.

The US has not publicly shared its principal objectives, but these are likely to be:

• Prevent Iran from projecting strength beyond its borders
• Prevent Iran from policing dissent within its borders
• Project the strength of the US and its allies in the region, and remove Iran as a geopolitical threat

Reports suggest the US is looking to seize control of Kharg Island in the Strait of Hormuz. The US would likely need boots on the ground to do this. The strait is a key chokepoint through which passes roughly 20% of global oil and liquefied natural gas (LNG) supplies.

Ultimately, controlling the oil supply through the strait will define the near-term consequences of the conflict and give leverage. The US may want a Venezuela-type deal: install a US-friendly regime and influence the country and region, without broader commitments.

The US has said that it is not seeking regime change.

The US initially said it expects to take four to six weeks to achieve its aims. It’s noteworthy that President Trump will meet China’s President Xi on 31 March. The US may view the China-Iran relationship as a threat. For its part, China may now view its designs on Taiwan through the lens of the US’s extra-territorial adventurism in Venezuela and Iran. Most of Iran’s oil exports were going to China as sanctions had ruled out other buyers. A prolonged confrontation could test China’s energy security. This geopolitical jigsaw may define the direction of their strategic conversations, on topics ranging from export controls on rare earths to tariffs.

Wars are expensive. By some estimates, it will take the US years and billions of dollars to replace and repair the damage already done to its assets, and those of its allies, in the Middle East. Wars may also be unpopular. As the death toll rises of those military personnel who pay the ultimate price for war, Trump’s popularity at home may wane. With the US mid-term elections ahead in November, that will be a concern for Republicans seeking to maintain control of the House and the Senate.

Right now, it’s the US motorists’ sensitivity to the cost of filling up their vehicles which might be a worry for Trump. US gasoline prices are up around 15% over the last week or so. Equally, the prices of some lower-value, higher-frequency purchases are also up this year. This matters to consumers’ perception of the cost-of-living ‘crisis’ which Trump has put front-and-centre of recent campaigning. In the UK, the Government has also acknowledged these risks.

The energy price shock is now comparable to after Russia’s invasion of Ukraine in 2022  . The difference is that in 2022, inflation was already high. Whilst global, the shock is currently being most keenly felt in Asia, given that such a large amount of the continent’s oil and gas originates in the Middle East, and some Asian economies are large net importers of energy. Amidst rising prices, the US is temporarily relaxing its sanctions to grant India a 30-day waiver to buy Russian oil. It’s possible that Russia may step in and supply China with more oil, even though China has large domestic reserves.

Brent Crude’s ~41% increase during the first week of the war was the quickest since the Covid-19 rebound in 2020. The interruption of supplies through the Strait of Hormuz has currently knocked out about 3.5 million barrels per day (bpd) of production. Primarily, the issue is not one of production – it’s about storage. With few tankers risking the Strait and being unable to offload their cargoes, storage is limited. It’s estimated that another week of conflict could take out a further 4 million bpd. And even if the war were to end tomorrow, the shock has been significant enough to take some time to unwind.

In inflation-adjusted terms, we are at the point where the US has historically released oil from its reserves. The US is pushing for the G7 to release between 300 million to 400 million bpd from their own. These measures would only be a stopgap. They would be designed to buy the US time to ride out short-term market dislocations until its larger military objectives are met.

At the time of writing, the G7 has not coordinated any action. The recently fractured relationships between the US and its erstwhile allies may mean the G7 exerts influence over the US in this regard – though ultimately, withholding supply to gain leverage with Trump would be an act of self-harm if the conflict rumbles on.

Government borrowing costs have gone up, with yields rising (as bond prices fall), adjusting for the prospect of a notable change in inflation if the war persists. In the UK, for example, the 10-year gilt yield rose from 4.23% before Chancellor Reeves’s Spring Forecast last week to around 4.61%. In the US, the yield on 10-year treasuries spiked from ~3.95% to 4.15%. However, at the time of writing yields have fallen somewhat.

There are already reports that some fuel suppliers are rationing orders. This raises the prospect of higher fuel costs for consumers and businesses. For aviation and tourism, this may impact the summer holiday season in Europe and beyond, if the conflict persists.

The good news is that currently expectations of inflation are still anchored – for now. But on balance, short-term rates are being priced to rise more quickly than longer-term rates. This may augur slower economic growth, or even contraction, as markets anticipate tighter credit conditions. 

That said, there’s not yet any evidence that policymakers will switch from cutting to hiking interest rates. True, the US labour market shed 92,000 jobs in February rather than gaining an expected 60,000. January’s jobs data was also revised down and the unemployment rate ticked up to 4.4% from 4.3%. This weakness might otherwise encourage the US Federal Reserve (Fed) to cut interests rates. But policymakers must now weigh up the impact of war.

Higher oil prices may also feed into a more stagflationary undertone to the markets until this period settles: a combination of higher inflation, lower growth and a weaker jobs market. This may weigh on asset prices in the short run.

As the conflict grinds through its second week, there’s still a risk-off feel to the markets. Despite the falls, and in some cases wild intra-day swings, many equity markets are still positive on a year-to-date basis. At the time of writing, markets are calmer. A couple of things are apparent:

• In the short-run, equities will continue to move inversely to oil prices
• US exceptionalism has, to a degree, been challenged this year, but US equites fared better than other major equity markets during the first week of the conflict – perhaps reflective of its greater self-sufficiency in energy
• Initially, UK, European and emerging market equities were hit hardest given their sensitivity to imported energy
• The resilience of emerging markets equities is being tested. After a stonking 2025, a combination of a shock for many energy exporters and a stronger dollar might temporarily offset an improving picture for inflation and fiscal discipline
• These markets are complex. As well as fretting about the relative winners and losers from AI disruption – a major theme so far this year – investors must now consider the consequences of a new energy shock and war in the Middle East
• Sectors which sold-off in February – such as software-as-a-service (Saas) stocks – have recovered. Meanwhile, it’s curious that other sectors, such as consumer staples, struggled last week
• The recent re-rating of AI-related names may have run its course for now. It could be that oversold pockets of the market are emerging, representing opportunities 
• Credit spreads – the additional yield an investor may expect from lending to a company rather than a government – are relatively unchanged in dollars and euros and only a little wider in sterling. To date, this suggests that the conflict is not stressing corporate credit markets.  If oil stays around $100 per barrel for longer, this may spark a change
• Not all safe-haven assets behaved as we might expect. Gold has been mostly range-bound and actually fell -2% during the first week of the conflict (in dollar terms) – heightened geopolitical risk may have already been priced-in
• This year has so far been relatively good for multi-asset, active management. The broadening of market returns, and indeed the volatility, is creating opportunities
• An old Wall Street adage says that attitudes follow price. Markets may well have to get a little worse from where we are. But they tend to make a low at the point of maximum despair or bearishness. This point will come 

Historically, geopolitical shocks tend to produce short-term volatility rather than lasting bear markets, unless they lead to a sustained economic slowdown. So far, we have avoided this scenario. 

Casting our minds back to the start of this decade, it’s remarkable just how well corporates have tackled a bombardment of challenges: Covid-19, run-away inflation, Russia’s invasion of Ukraine, higher energy costs and AI disruption to name but a few. It may be reassuring to look in the rear-view mirror to remember just how resilient economies and companies have been when facing seemingly insurmountable challenges. 

It’s important to balance near-term risks with long-term opportunities. Right now, markets are coping with uncertainty rather than pricing a downturn.

As the situation in the Middle East evolves, markets will likely be volatile in the near term. We continue to monitor developments closely and assess their implications for global growth, inflation and financial markets.

We believe investors will be best served by focusing on tried and tested methods: time in the market, not timing the market; diversification; and sticking to a long-term plan. Our investment team remains laser-focused on fundamental analysis and assessing the investments we believe offer the best risk-reward for our clients.

This article was written on 10 March 2026

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