Weekly Market Recap

Last week, markets gained for a second consecutive week, and credit spreads narrowed despite the single most important driver of market sentiment, the evolving situation in the U.S.-Iran war.

When European investors departed for the Easter weekend, President Trump’s deadline for the reopening of the Strait of Hormuz was hanging over markets. President Trump had promised to unleash a wave of strikes against power and desalination plants if the Strait was not reopened by Easter Monday. That deadline was extended to 20:00 local time last Tuesday (01:00 on Wednesday in the UK).

Shortly before that deadline, it was announced that a ceasefire agreement had been reached, which became the week’s defining moment. The ceasefire, agreed between the U.S. and Iran, is conditioned principally on the reopening of the Strait of Hormuz to commercial shipping. Iran confirmed the Strait would be ‘navigable’, but the details remain deeply contested.

The Iranian idea of an open Strait seemed to require transit fees, which is something that multiple regional and global consumers of Gulf oil have refused to consider, complicating the path to a durable resolution.

By the time European markets opened, it was clear that this ceasefire was imperfect. There was confusion over the terms, suggestions that the parties had agreed to different drafts and disputes over whether the ceasefire extended to action in Lebanon.

Several countries have refused to negotiate transit with Iran, and President Trump has made clear that transit fees are not part of the agreement. As a result, shipping did not meaningfully resume in the Strait ahead of scheduled talks between Iran and the U.S. in Islamabad, Pakistan over the weekend.

Disagreements extend beyond the issue of transit fees, with Iran also demanding reparations for war damage.

By the beginning of this week, the emphasis had changed, with President Trump instead choosing to impose a blockade on vessels bound for Iranian ports. U.S. officials announced this has prompted Iran to make contact again, and new talks are rumoured to be taking place this weekend.

What are the possible outcomes?

Helima Croft of RBC Capital Markets outlined three possible scenarios:

• The divide between Washington and Tehran’s negotiating positions proves too difficult to bridge and fighting resumes.
• A deal is reached that largely meets Iran’s established enrichment and missile priorities and comes with the added bonus of control of the Strait of Hormuz.
• A no-peace, no-hot-war pause of indeterminate duration emerges that renders the ultimate security of the region’s waterways unsettled.

The resilience of equity and credit markets would suggest that investors are not positioned for the first option. The extending deadlines, erratic social media posts, and lack of response to reports of ceasefire violations suggest that the U.S. is reluctant to escalate military action further, possibly due to the humanitarian or political consequences.

The central purpose of the initial action was to prevent Iran from achieving the capability to produce a nuclear weapon, but Iran now demands the right to enrich uranium without supervision.

It seems inconceivable that the U.S. could agree to that, as it would mark a huge backward step from the Joint Comprehensive Plan of Action (JCPOA) agreement, which President Trump pulled America out of in 2018.

By Friday, there had been no meaningful commercial traffic transiting the Strait of Hormuz since the ceasefire was announced. Oil prices remained within touching distance of USD100 per barrel, underscoring the continued tightness in energy markets.

Equity and credit markets remain strong

It may be surprising against this backdrop that equity and credit markets have remained resilient. For context, markets found stability prior to the ceasefire agreement, reflecting the fact that many investors reduced risk during the early weeks of the war.

Markets continue to enjoy inflows from relatively robust employment levels and companies are buying their shares back. Under such circumstances, the risks facing investors start to shift, with the potential for them to be under exposed to any good news, for example, Friday’s story that Ukraine’s top negotiator believes a potential peace deal with Russia is within reach.

European currencies and bonds all directly benefit from any easing of hostilities. UK bonds in particular offer the highest yields in the G7 because of the tendency to have higher interest rates. Policy is slightly restrictive already, so there’s a weaker case for interest rate increases.

Despite such high yields, the predominantly long-dated funding of the UK means that it has been protected to some extent from the sharp increases of bond yields in recent years. So, despite its bond yields being the highest in the G7, the rate it pays (the coupon on its bonds) is close to average.

As we’ve previously noted, the UK bond market and sterling closely reflect the economic reality of the UK economy, however the UK equity market is more international and very diversified across sectors.

The relatively high weightings in defensives and energy mean that it will remain more defensive than other equity markets if conflict intensifies, and it will benefit less than other major European markets from an easing of hostilities.

Coming up – 14 April to 20 April

Earnings season:

First-quarter earnings will be released for several companies this week, kicking off, as always, with the banks, but also including Dutch semiconductor equipment maker, ASML.

Informed views:

The International Monetary Fund (IMF) publishes its World Economic Outlook and Global Financial Stability reports this week.

China data:

Gross domestic product (GDP), industrial production and retail sales will be released by China on Thursday. The economy has struggled to maintain momentum recently and is exposed to higher energy prices and disruption from the war in Iran.

Markets return from the Easter break facing another key deadline in the U.S.– Iran war.

President Trump’s original deadline for reopening the Strait of Hormuz passed over the weekend and was extended to today at 20:00 local time (01:00 the UK) after which he had promised to target desalination and power plants (the emphasis seems to have shifted to bridges and power plants).

The threat of further military escalation is real, and equity and bond markets have made and held small gains over the last week. Markets are dispassionate and consider only economic consequences rather than political or humanitarian ones.

Even so, it might seem surprising that markets have remained calm, despite depleting energy reserves and system redundancy tightening the market further. From an economic perspective, an escalating conflict and a deadlocked one have largely the same implications. In both scenarios, the Strait of Hormuz (the Strait) is already largely closed with only a few vessels passing through on Iranian terms.

An escalation of the conflict, therefore, would not necessarily impede transit any more than the current situation already does. What matters is whether it moves the situation closer to, or further away from, an open Strait. With or without escalation, the Strait can reopen shortly after the end of hostilities, which can occur whenever the U.S., as the dominant military power in the region, chooses.

With the original aims of the action having been quite loosely defined, a form of regime change has occurred, as has a form of disarmament, though the recovery of enriched uranium seems like a far harder hurdle to clear. If the U.S. were to cease hostilities, Iran might continue disrupting shipping briefly as a deterrent against future action but would ultimately benefit more from allowing normal service to resume.

As long as the economic impact of the war doesn’t worsen and the economy keeps moving, maintaining hedges and short positions becomes increasingly costly, allowing markets to gradually stabilise. Most equity markets have recovered from their lows, indicating that technical support is kicking in, with last week’s sharp mid-week rally driven more by deeply oversold positioning than by any substantive change in the conflict’s trajectory.

The more consequential risk remains the Strait. An extended closure would push energy prices to levels where demand destruction begins, weighing on growth alongside demand for aluminium and other industrial metals. Brent crude traded above USD115 per barrel last week, and investors are now attempting to price in the growth implications.

The oil supply picture remains precarious. Research suggests that beyond mid-April, once de-sanctioned Russian and Iranian floating crude and strategic reserve stocks are drawn down, the oil deficit could rise from 4.5/5 million barrels per day to approximately 9/9.5 million barrels per day.

On prediction markets, roughly 50% of participants expect more than 20 ships to transit the Strait by the end of April, with only about 40% expecting 30 or more, well below the pre-war average of approximately 100 ships per day. Even 30 ships per day, combined with activated pipelines in Saudi Arabia, the UAE, and Iraq, wouldn’t restore pre-war supply levels. This implies oil prices would need to remain significantly elevated to balance the market.

Elsewhere, the Houthis’ entry into the broader conflict last week, threatening Saudi oil infrastructure, prompted retaliatory strikes on two of the world’s largest aluminium smelters in the region. The producer stated it had sustained significant damage, and it would take “considerable time” to bring capacity back online. For context, the Middle East accounts for approximately 9% of global aluminium production, and the two affected smelters produce around 3.2 million tonnes per year.

Gas prices have returned to levels last seen at their January peak, though they remain well below the 2022/23 extremes. The feed-through to consumer prices will take time but is now a clear risk to the inflation outlook.

European markets must now wait until tomorrow’s 01:00 deadline to see how the next phase of the conflict develops.

Quarterly performance (to 31 March):

Emerging markets were the best-performing major region over the quarter, while the U.S. was the weakest. Currency effects were material, the S&P 500 underperformed in local currency terms over the final month but outperformed in sterling total return terms due to dollar strength.

UK motor finance:

The FCA announced motor finance payouts of approximately £7.5 billion, nearly £2 billion below original estimates, with 12.1 million loans eligible for compensation of up to £829 each. This should benefit domestically focussed banks and lenders that had provisioned for higher figures.

Coming up – 7 April 2026 to 13 April 2026

U.S. jobs: 

The U.S. job openings and labour turnover survey will give a granular breakdown of how strong the jobs market was before the conflict broke out. The non-farm payroll report on Friday will then detail how many jobs were created or lost in the first month of the conflict.

The deadline: 

President Trump’s deadline for Iran to re-open the Strait of Hormuz on 6 April has passed and is now set for today at 20:00 local time, 01:00 (8 April) in the UK.

The battle for hearts and minds:

Several business and consumer surveys, as well as the regular flow of opinion polls, will gauge the impact of gasoline prices returning to levels last seen in mid-2022.

The markets are being reshaped by escalating Middle East tensions. This update explores energy shocks, inflation risks and sector winners and losers as investors navigate volatility, policy constraints and fragile confidence.

The dominant theme of the last week was the Iran war and its far-reaching consequences for global energy markets, risk assets and central bank policy. Europe saw sharp equity declines as escalatory rhetoric from both Washington and Tehran rattled markets.

This followed President Trump issuing a 48-hour ultimatum, demanding the reopening of the Strait of Hormuz (the Strait) and threatening strikes on Iranian power plants. But markets rallied as this was later extended to a five-day deadline and subsequently a ten-day deadline, reflecting the President’s assertion that progress is being made in negotiations between the two parties. Iran, however, was characteristically defiant: issuing counterthreats targeting U.S. military bases, energy infrastructure of nations perceived to be assisting the U.S. war effort, desalination facilities and notably financial institutions holding U.S. Treasury bonds.

As the week progressed, a familiar pattern emerged, brief risk-on rallies on hints of diplomacy, followed by renewed pessimism as the facts on the ground failed to improve. Last Tuesday (24 March), President Trump posted a lengthy statement claiming “advanced negotiations” with Iran toward a “complete and total resolution of hostilities.” Iran’s foreign ministry acknowledged that messages had arrived via intermediary countries but denied any direct negotiation with Washington, stating that its stance on the Strait “has not changed.”

By last Wednesday, a 15-point plan had reportedly been transmitted via Pakistan, prompting a modest risk-on session. Iran eventually confirmed it had rejected a U.S. proposal. By Friday, the consensus among the geopolitical experts remained decidedly pessimistic regarding the scope for near-term de-escalation.

Helima Croft, Managing Director and Head of Global Commodity Strategy and MENA Research at RBC Capital Markets, noted that despite a minor uptick in vessels transiting the Strait, she doesn’t expect anything close to a normalisation of flows. 

The appointment of hardliner Mohammad Bagher Zolqadr, the former commander of the Islamic Revolutionary Guard Corps (IRGC), to head Iran’s Supreme National Security Council could signal a further coalescence within the regime around an uncompromising stance.

Escalation and leverage

A consensus exists among many observers that Iran does need to end the conflict, as it’s inflicting considerable pain on both the regime and the populace. However, the Iranian leadership wouldn’t accept a deal if they can avoid it, without first demonstrating their ability to inflict economic pain through their control of the Strait. The ability to frustrate that waterway would be the strongest means of discouraging further acts of aggression against the regime.

Historically, energy spikes and erratic acts by President Trump have been good entry points into markets ahead of what can be sharp rallies as conditions normalise. But the signs are not yet there that this is a great buying opportunity. While classic risk gauges such as the VIX have risen, they aren’t excessively elevated given the severity of the downside scenario – a possible sign that investors are reluctant to abandon their positions ahead of a possible rebound.

There are some lasting concerns too. Policymakers have significantly less bandwidth to provide support than in previous crises. Inflation has been above target in both the UK and the U.S. for approximately five years. Higher-for-longer energy prices risk de-anchoring inflation expectations, constraining central banks from easing even as growth deteriorates. There’s now an expectation that central banks will raise interest rates.

Meanwhile, elevated government indebtedness in many countries limits the scope for fiscal stimulus. In a recession, falling tax revenues and rising automatic stabiliser spending (welfare benefits) would compound the debt problem further. For now, back-channel talks continue with the hope of de-escalating the tensions.

Troop movements, however, suggest that the U.S. could be prepared to seize some territory (perhaps Kharg Island, through which most of Iran’s oil exports flow) or enriched uranium supplies, or to clear the coastal areas from threats to shipping. This could just be posturing, but recent history has suggested that troop movements do tend to precede deployments.

UK firms start to feel a costs pinch

European markets remain understandably pre-occupied by the Middle Eastern conflict, and specifically the impact on energy prices, which makes the UK’s official consumer price index statement seem less important overall. However, some data, such as the purchasing managers indices (PMIs), remain relevant.

Because they’re based upon companies’ surveyed responses since the outbreak of the conflict, the PMIs confirm that businesses are experiencing the fastest acceleration in input prices since 2023. This was most pronounced in manufacturing, but services output prices were affected too, although not enough to immediately offset the higher input costs.

The tone from policymakers has remained hawkish. Bank of England Chief Economist Huw Pill discussed how uncertainty shouldn’t be used as an excuse not to act to contain inflation. Fellow Monetary Policy Committee member Megan Greene discussed how there will be lasting inflationary effects from the conflict even in a “best-case” scenario.

By contrast, Deputy Governor Sarah Breedon did acknowledge that second-round effects would be less likely now than in 2022, due to the weaker labour market. That is unquestionably true, but, having spent most of the last four years missing the inflation target materially to the upside, policymakers feel compelled to err on the side of the hawks.

Sectors to be impacted differently?

Throughout Europe, the pass-through of higher energy prices affects companies via changes in monetary policy and more directly as well. High bond yields mean lower real estate valuations as well as less deal flow, because the financing costs for new deals have risen. European real estate sector yields, which had fallen to their lowest since 2022, have risen to their highest since 2023.

Sectors such as consumer services and retail, on the other hand, will see less volume growth because of the real income compression from energy price inflation. Price earnings ratios are at the lower end of their range but don’t currently stand out.

All these factors combine to affect auto sales, where financing costs, running costs and general economic confidence are all relevant considerations.

Coming up – 31 March 2026 to 7 April 2026

American jobs expectations:

The hope is that 51,000 new U.S. jobs were created in March despite the disappointing 92,000 net loss during February.

Early inflation estimates:

Several European countries estimate inflation for the month of March including the first wartime price increases.

War in Iran:

It seems likely that most news will surround progress towards a de-escalation, or alternatively the increasing prospect of U.S. troops entering Iran.

The current overarching theme is the evolving Iran war and its impact on global energy markets. Market participants have materially pushed out their expectations for the duration of the crisis.

RBC Capital Markets commodity strategist Helima Croft, following meetings in Washington, extended her estimated timeline for the conflict and associated energy disruption.

Even if the White House seeks an early exit due to rising economic costs, an emerging consensus suggests Iran would likely continue fighting for some time to deter future Israeli and U.S. strikes.

Energy prices have fluctuated in rhythm with the ebb and flow of attacks on energy assets. Israel struck Iran’s South Pars gas field, the world’s largest natural gas reserve, prompting Iran to intensify attacks on Qatari LNG facilities.

Qatar Energy confirmed missile strikes on several facilities early last Thursday morning (19 March), with sizeable fires reported (since contained) and extensive further damage. Attacks on energy assets seemed to reduce after intervention from President Trump.

The Strait of Hormuz remains a focal point. Reports suggest Iran may have begun laying mines, though this is unconfirmed.

Notably, Iran appears willing to negotiate safe passage with individual countries; India, Turkey, France, and Italy have all reportedly opened discussions, suggesting the Strait has not been aggressively blocked at this stage. Tanker traffic, however, remains severely disrupted.

How are the central banks responding?

As war continues, the big development was hearing from all the major central banks about how it is affecting their thinking.

The Federal Reserve (Fed)

The Fed held rates steady for the second consecutive meeting, as widely expected. The real substance came from updated projections and Chair Powell’s press conference, which together amounted to a hawkish hold.

Core personal consumption expenditure (PCE) inflation forecasts for 2026 and 2027 were both revised upward, reflecting sticky inflation and energy price pressures, with the target now not expected to be reached until 2028.

Long-run gross domestic product (GDP) growth was upgraded to 2%, the highest on record, and the long-run neutral rate rose to 3.1%, the highest since 2016, both signalling optimism around AI-driven productivity gains.

The median Federal Open Market Committee (FOMC) member still projects one rate cut this year, but Powell stressed this hinges on inflation progress that looks increasingly uncertain.

Notably, he declined to call the current energy shock transitory, given the succession of supply shocks in recent years, a theme echoed across central banks globally.

The productivity upgrade aligns with the views of Kevin Warsh, Trump’s nominee for the next Fed chair, who argues AI will act as a disinflationary force. However, several FOMC members have cautioned that such gains could raise the neutral rate rather than facilitate cuts. With core PCE at 3.1% and above target for nearly five years, the bar for easing remains high.

The Bank of England (BoE)

The BoE held rates in an unanimously hawkish decision, a surprise, as markets had expected two dissenting votes in favour of a cut. Even the typically dovish Swati Dhingra acknowledged that a prolonged supply shock could warrant tighter policy.

Mechanical estimates suggest even a modest 10% rise in gas and petrol prices would add roughly half a percentage point to the consumer price index including owner occupiers’ housing costs (CPIH), with larger increases producing proportionally greater effects.

These are the direct effects on prices, but if they should push inflation to the psychologically important 4% threshold, history suggests more aggressive household inflation expectations would follow.

The labour market offers some comfort, with the vacancy-to-unemployment ratio below the BoE’s equilibrium estimate and surveys pointing to relatively loose conditions. Ironically, the early signs of stabilisation in unemployment earlier this year and the strongest payrolled employee growth since October 2024, could end up tipping the BoE’s hand towards tighter policy.

The 10-year gilt yield has approached 5%, levels not seen since the financial crisis. The move in gilts has been larger than in most major eurozone sovereign markets, reflecting both inflation concerns and heightened anxiety around UK fiscal sustainability.

There is a clear relationship between the rise in a country’s 10-year yield and its debt-to-GDP ratio. The UK’s persistent inflation problem, worse than the eurozone’s, and expectations that the government may respond to the crisis with more deficit-spending (both potentially inflationary policies), are compounding the sell-off.

The European Central Bank (ECB)

As expected, the ECB held rates steady for a sixth consecutive meeting.

President Lagarde highlighted the Iran conflict as creating upside risks to inflation and downside risks to growth and notably avoided repeating that the ECB is in a “good place,” instead describing it as “well positioned” to navigate uncertainty.

Staff economists significantly raised their 2026 inflation forecast to 2.6%, although they still expect a return to target by 2027–28.

The ECB also published alternative scenarios given the uncertain outlook, with the worst case projecting a euro-area recession accompanied by a sharp spike in inflation.

The Bank of Japan (BoJ)

The BoJ held its key rate at 0.75% in an 8:1 decision, with the sole dissenter in favour of a hike to 1%.

The bank cited the Middle East situation and rising oil prices as a new risk, though Governor Ueda said he needed more time to assess the impact.

He noted that spring wage talks are expected to yield solid results, with attention now on whether higher wages spread to smaller businesses.

Unlike other major regions, there has been little change in Japanese interest rate expectations.

Coming up – 24 March 2026 to 30 March 2026

G7 meeting:

Foreign ministers from the G7 countries meet to discuss the Iran war on Thursday.

Economic outlook:

The OECD will publish its economic outlook.

Central banks speak:

As central banks have emerged from their quiet periods, speakers will have an opportunity to finesse the generally hawkish messaging which they delivered to the market last week.

While initial U.S. and Israeli strikes successfully degraded Iran’s conventional missile and launcher stockpiles, the country’s Islamic Revolutionary Guard Corps (IRGC) has transitioned to an asymmetric campaign designed to inflict maximum economic pain rather than achieve conventional military objectives.

In extremis, this can take the form of the threatened ‘decentralised mosaic defence strategy’, a response to invasion where resistance would not require central organisation.

The current asymmetric phase involves the deployment of low-cost drones in large swarms; GPS-spoofing of tankers; small, fast boats packed with explosives; and, most critically, the reported laying of mines in the Strait of Hormuz.

U.S. intelligence reports confirmed that at least some mines have been deployed; a significant escalation given that mine clearance operations can take weeks or even months. The White House also confirmed the destruction of small boats suspected of belligerence.

The economics of this asymmetric approach are striking. Iran’s Shahed drones cost less than USD30,000, yet it can require multimillion-dollar interceptors to repel them. Stocks of U.S. and Israeli interceptors are starting to run low, and there is limited capacity to replenish those stocks due to what we understand to be a two-year production lead time. So, the risk is that U.S. and Israeli resilience to counter measures could eventually be degraded.

Tanker traffic effectively grinds to a halt

Tanker traffic through the Strait of Hormuz has halted, except for a limited number of vessels identified as part of Iran’s shadow fleet or those spoofing Chinese ownership. The Financial Times reported previously that some vessels are falsifying Chinese crew or ownership documentation to achieve safe passage.

The market briefly swung on a false report that the U.S. navy had escorted a tanker through the Strait, although the feasibility of such a plan is believed to be very limited.

According to RBC Capital Markets’ Washington contacts, the White House had expected a shorter and more decisive conflict with less economic fallout. As such, U.S. and Israeli objectives remain fluid, with the possibility of ground forces apparently under consideration to recover Iran’s enriched-uranium stocks.

Israel again expressed its hope that the Iranian people would use this opportunity to rise up against the unpopular regime and that the succession of Mojtaba Khamenei as Supreme Leader, a dynastic transition widely loathed even among regime sympathisers, might increase factional opposition within Iran. However, the imposition of martial law is containing domestic unrest for now.

Will consumer energy prices rise?

Most oil coming from the Gulf would typically head to Asia, but crude oil is a global market, and prices have risen fairly uniformly.

However, consumer prices of oil-based products such as petrol have very different rates of taxation, with European prices routinely far higher than in the U.S. So, while the response to the jump in crude prices will be similar, it will feel proportionally larger for U.S. consumers.

While the crude price impact is unwelcome, the more worrying impact has been felt most forcefully in gas prices. Domestic gas prices in the U.S. have been barely affected but Asia and Europe are highly reliant upon liquefied natural gas where prices are more global, and these prices have risen sharply.

Consumer gas and electricity prices will reflect these moves but often with a lag. So, the UK, for example, won’t reset the utility bill price cap to incorporate current gas costs until July. And while the jump in gas prices is dramatic it still falls considerably short of the increases suffered during 2022.

Should prices continue to rise, however, then governments may, as they did then, consider subsidising utility consumption. If so, that would put greater pressure on already stretched public finances.

Continued impact on bond markets and interest rates

This has been one of two factors putting pressure on bond prices, the second being interest rate expectations. Before the conflict, the UK was expected to cut interest rates twice more this year. That expectation has now morphed into an expected rate increase and, critically, mortgage rates have begun to adjust in anticipation.

This is frustrating, because data released last Friday suggests the UK economy didn’t grow during January, despite the helpful tailwinds of lower (and slowing) inflation and recent cuts to interest rates. Weakness was quite broad, but it will be the stagnation of the large service sector that causes the most angst.

Ordinarily, this would not be too concerning, given the data can be revised and other indicators suggest that UK economy has been robust. However, in the context of a more challenging global environment, due to conflict in Iran and the wider Middle East, this evidence of a weak start to the year will add to concerns about the UK’s outlook for 2026.

The prevailing beneficial decline in inflation is at risk from the sharp rise in energy prices. The UK is vulnerable to rising gas prices, although it will take until July for the direct impact to reach households.

Higher energy prices are likely to drain household incomes that could otherwise be used for discretionary spending. The two anticipated interest rate cuts have evaporated, and some of the impact of that is already being felt with higher swap rates, which are translating into elevated mortgage rates and providing a second dampener on domestic demand.

Coming up – 17 March 2026 to 23 March 2026

The conflict continues:

Clearly the resolution or continuation of conflict in Iran and its impact on energy markets will be top of mind for markets.

Rate setting:

The U.S. and the European Central Bank (ECB) will be setting interest rates during the week.

Remember AI?

NVIDIA’s Jensen Huang speaks at a global AI conference.

Since then, we have seen the power over Iran move to Mojtaba Khamenei. As the son of the previous Ayatollah, this signals a continuation of Iran’s previous policy of resistance. Given that he has lost parents, siblings and children in the attacks, there does not seem to be an obvious path to de-escalation.

This sent oil prices well over the psychologically important USD100 per barrel mark, before falling alongside a broad market rally on confidence from President Donald Trump that the war would be completed soon.

Notably, the market was somewhat flat-footed. Positioning data suggested limited long exposure to crude oil heading into the weekend, implying traders hadn’t meaningfully positioned for what could be a significant supply shock.

The key concern is not Iran’s own production, at roughly 3.2 million barrels per day, it represents just over 3% of global supply. Rather, it is the potential disruption to the Strait of Hormuz, through which approximately 20% of the world’s oil passes. Iran’s Revolutionary Guards have warned that passage through the Strait of Hormuz is not permitted, and traffic has already dried up as insurers either raise premiums or cancel coverage altogether.

However, with Iran facing the world’s dominant military force, surrounded by regional enemies, and with Russia incapable of providing meaningful assistance, the base case among market participants is for a relatively short conflict. This is despite several challenges that make a decisive victory difficult.

There is speculation that Iran may become rapidly overwhelmed in the current direct conflict, and could resort to an asymmetric phase, in which the goal is not to defeat but rather to frustrate their opponents through, amongst other things, maritime disruption of the Strait of Hormuz.

This would be accomplished through Iran’s ‘mosaic’ strategy of using decentralised provincial units that have been pre-authorised to harass shipping through surface-to-sea missiles and drones. A major concern is Iran’s remaining capacity to deploy mines in the Strait, which would not require its largely disabled naval fleet.

Conversely, Iran’s economic situation was dire heading into this crisis. Official inflation stands at 68% year-on-year, though this almost certainly understates the problem given shortages and the collapse of the Iranian currency.

Compare this to wage growth of just 45% over the same period, and the pressure on ordinary Iranians becomes clear. The longer the conflict continues, the more this economic strain may force the regime towards negotiation, especially as closure of the Strait cuts off Iran’s own oil income.

How are energy markets and portfolios impacted by the conflict?

For energy stocks, the picture is nuanced. For example, the two major UK oil producers, BP and Shell, naturally benefit from higher crude oil prices and elevated volatility as their trading operations tend to thrive in dislocated markets. BP’s oil trading earnings rose by roughly USD1 billion in a single quarter when conflict last flared in the region two years ago.

BP benefits from having limited direct Middle East upstream exposure (around 8% of volumes, none of which are from Iran) and superior trading optionality. Shell benefits from greater sensitivity to the more significant liquefied natural gas price rises.

Bond markets react to inflation concerns

The conflict’s impact on UK inflation expectations has been swift. European natural gas prices doubled in the early part of the week, approaching levels not seen since early 2023. This was sufficient to shift Bank of England (BoE) rate expectations from two cuts over the coming year to just one.

Gilt yields have risen more sharply than in other markets. This partly reflects positioning after a solid rally in recent months, but also the UK’s particular vulnerability to energy price shocks as a net importer. With current yields approaching 4.5%, gilts offer attractive value relative to global sovereign bonds.

Chancellor Rachel Reeves delivered the Spring Statement earlier last week (3 March). She resisted the temptation to adjust tax policy as the Office for Budget Responsibility forecasts implied that headroom against fiscal rules has improved. However, those forecasts have been overtaken by events in the Middle East.

Dollar strength and currency dynamics

The differences in energy competitiveness between the self-sufficient U.S. and Europe and Asia, which are reliant upon imports, drive divergences in asset class performance across equities, bonds and currencies. The clearest representation of this is in gas prices, which are more sensitive to local supply than oil, which trades globally.

U.S. gas prices were unmoved by conflict in the Middle East, whereas UK and European futures prices soared, undoing a lot of the improvement in relative competitiveness that European futures had enjoyed since July last year.

Precious metals: Gold under pressure

Gold continued to be under pressure last week. This was due to the strength of the dollar and generally weaker sentiment amid Middle East tensions from both retail and institutional buyers. After having such a strong run over the last two years, led largely by central bank buying, we have now seen the first public hints of a possible sale by this group of investors.

Thursday saw the Polish central bank chief lay out a proposal to generate as much as USD30 billion from the sale of the country’s gold reserves to finance defence spending. While it’s legally prohibited for Poland’s central bank to fund the government directly, the mere fact that one of the most aggressive central bank buyers of gold is considering such action given current gold prices is telling, and something that needs to be monitored going forward.

Economic data: U.S. payrolls

The U.S. economy unexpectedly shed 92,000 jobs in February, falling far short of forecasters’ expectations of a 55,000 gain. The unemployment rate rose to 4.4%, up from 4.3% in January. Adding to the weak headline, December and January payrolls were revised down by a combined 69,000 jobs.

The data signals the U.S. labour market remains in a ‘low-hire, low-fire’ mode as employers navigate tariff-related inflation pressures, AI adoption, and geopolitical uncertainty. Thrivent’s David Royal noted that while AI may be contributing to productivity gains, which helps explain why economic output has grown even as hiring has slowed, companies remain uncertain about their future workforce needs.

The healthcare sector lost 28,000 jobs (largely due to a Kaiser Permanente strike during the survey period), while the information sector shed 11,000 jobs, and the federal government cut 10,000 jobs. Social assistance was a rare bright spot, adding 9,000 jobs.

Wage growth also ticked higher, with average hourly earnings rising 0.4% to USD37.32 in February and annual growth coming in at 3.8%.

As with the BoE, markets have already scaled back Federal Reserve (Fed) rate cut expectations, from over two cuts to just over one by year end. Friday’s data crystallises the key risk: a sharp employment slowdown coinciding with persistent inflation concerns could back the Fed into a difficult corner and create a substantial headwind for markets.

Corporate earnings: Broadcom delivers

Amid the geopolitical noise, Broadcom delivered a strong beat driven by its AI semiconductor business, which more than doubled year-on-year. The company now expects to make USD100 billion in AI semiconductor revenue for 2027, a remarkable figure that provides considerable comfort around the durability of AI-related capital expenditure.

Importantly, Broadcom has secured its supply chain, wafers, packaging, high-bandwidth memory – at a time of rising costs and industry-wide shortages. Concerns around gross margin dilution from the AI business appear overdone, with management signalling improved yields and scaling cost structures.

The stock now trades on 20 times 2027 earnings and is therefore priced for a significant slowdown in growth, with scope for further upgrades.

This provides a constructive read-across for the broader AI supply chain, as do comments from Alphabet’s CFO, Anat Ashkenazi, at Morgan Stanley’s Tech, Media and Telecom conference, which reiterated that demand exceeds supply for cloud services. Meanwhile, AMD’s CEO, Dr. Lisa Su, expressed that the cycle “continues to feel very durable”.

Coming up – 10 March 2026 to 16 March 2026

War in the Gulf:

The extent to which the fractured regime in Iran prioritises external conflict over maintaining domestic control will be key.

U.S. economic data:

U.S. inflation data released this week is estimated to show prices continuing to rise at 2.4% per annum before the impact of the oil price rises takes effect.

European Central Bank and Fed speakers:

The market assumes inflation driven by energy prices means interest rates should rise. However, policymakers may choose to look through temporary increases in costs, which serve to diminish demand. Interest rate rises usually depend on how policymakers view workers’ ability to demand higher wages.

The immediate market response

The immediate impact of the strikes saw most equity prices drop lower on Monday morning (2 March). This is quite a normal reaction and reflects a primary concern: that conflict in the Middle East will drive energy prices higher. Any increases would be reflected in higher inflation, which raises costs for businesses and households, reducing economic growth and profits. But how severe might this impact be?

Oil shocks: Then vs. now

Investors with long memories will remember when the oil price rose sharply in response to conflict in the Middle East in the 1970s, and then again in 1990 due to the Gulf War. For context, those price surges were far more severe than what we have seen so far. In early trading, oil prices rose 10%, whereas previous shocks have tended to see increases of at least 100%.

Could prices rise much further? That is the most difficult thing to forecast. Iran’s oil production comprises about 3-4% of global supply. Although it is heavily sanctioned by Western powers, there are still buyers, of which China is by far the largest, which means that Iranian oil still affects global prices.

Iran’s geopolitical isolation also limits its ability to sustain major supply disruptions. Even China, its key ally, needs Iranian energy to keep flowing.

The Strait of Hormuz: A critical passage

Iran’s influence on the global oil and gas market extends beyond its own production. The most sensitive factor is the ability of tankers to navigate the Strait of Hormuz, a narrow maritime passage that serves as the world’s most critical energy chokepoint. Bordered by Iran’s coast, prolonged disruption to shipping here would cause oil prices to spike.

While disturbing the Strait might be Iran’s most potent means of harming its aggressors, it will come at the cost of lost oil revenue and that cost will be borne by all the Gulf states who currently export via the Strait. The other party losing out is China.

While U.S. confidence in keeping the Strait navigable remains unknowable, we can be certain they have considered the implications if it remains closed. Polls of U.S. registered voters suggest that military action against Iran was only supported by around a third of respondents and that inflation remains the most important issue¹ during this mid-term election year.

Crucially, the global economy is becoming less dependent on oil in general and Middle Eastern supplies in particular. As oil consumption relative to GDP steadily declines, the market is showing greater resilience; while prices exceeded USD 120 per barrel in 2022, they remain below USD 80 even after the latest jump (correct at the time of writing).

Impact on your energy bills

Nobody likes paying a lot to fill their car with fuel, but Europeans tend to be less sensitive to oil price changes because the impact is dulled by fuel duties. They are, however, more sensitive to changes in utility bills and will remember the dramatic changes following Russia’s invasion of Ukraine.

In fact, inflation is expected to decline this year as falling natural gas prices slowly filter through to consumers, the UK’s energy price cap policy delays the pass-through of energy prices into household bills.

As a rule of thumb, if wholesale gas prices rise on a sustained basis by 10%, that could increase headline consumer price inflation by around 0.5%. Recent sustained price declines mean that inflation is likely to fall in April by 0.4%. However, Iranian drone attacks on the Qatari LNG export facility have caused its closure, leading to a sharp rise in LNG prices.

If those higher prices were to be sustained, then UK-regulated prices would eventually increase. Although for context, prices after the closure have returned to the level they were at a year ago and remain a fraction of those seen during 2022. Importantly, the UK has reduced its Middle Eastern LNG dependence in recent years, increasingly relying on U.S. supplies instead.

Bond market implications

Bond markets have reflected the potential increase in inflation to a small extent. They would be most concerned if there was any expectation that it would mean higher interest rates. Before the attacks, two UK rate cuts were expected over the coming year, after those, that second cut hangs in the balance.

While energy prices could generate upward inflationary pressure, it would also dampen consumer spending on other goods and services. So, while the impact on most bonds is mixed, the prospect of higher inflation has helped the performance of inflation-linked bonds.

Spending on defence will add to pressure on the U.S. public finances. This is one reason why gold, rather than traditional bonds, is currently serving as a more effective hedge against geopolitical risk. We are also seeing the U.S. dollar strengthen as global risks rise, following a familiar historical pattern.