Middle East conflict shakes markets as ‘everything hinges on the Strait of Hormuz’

John Wyn Evans, Head of Market Analysis at Rathbones, warns that markets have moved into risk-off mode as escalating tensions in the Middle East refocus attention on energy supply routes and inflation risks.

John Wyn Evans, Head of Market Analysis at Rathbones, said: 

“Global markets opened the week on a risk‑off footing as investors react to the escalating conflict in the Middle East and renewed uncertainty surrounding Iran. Equities are broadly lower, with the sell‑off most evident in sectors sensitive to geopolitical stress such as travel and leisure. Traditional safe‑haven assets — notably gold, the US dollar and, to a lesser degree, government bonds — have attracted inflows, although concerns about potential inflationary pressures have pushed yields higher this morning.

“From a global perspective, pretty much everything hinges on the Strait of Hormuz and the implications of any disruption to global energy flows. Oil prices already reflect a sizeable risk premium, with current levels implying an expectation of a limited but meaningful interruption to shipping, but analysts note that the impact would worsen quickly if the closure were protracted, given the non‑linear nature of supply constraints. The longer it is closed, the worse the effects. For now, inventories and limited rerouting options provide some buffer, but the situation remains finely balanced.

“Broader financial conditions have also tightened, driven in part by fragility across US financials and concerns around credit exposures linked to private lending. This adds a layer of pre‑existing vulnerability at a moment when geopolitical uncertainty is rising. Credit spreads widened last week, and volatility indicators remain elevated but contained — suggesting a market that is nervous but not yet pricing in a systemic event.

“Overall, the consensus among market strategists is that the conflict is likely to remain contained in duration and scale, though the risk of miscalculation is high. In the near term, the interplay between geopolitical tension, energy markets and inflation expectations will be the main driver of sentiment. Investors are likely to remain cautious until clarity emerges on both the security situation and the extent of any supply‑side disruption.

Commenting on what this means for consumers and possible impact on tomorrow’s Spring Statement, Isabella Galliers-Pratt, Senior Investment Director at Rathbones, says: “While the latest developments in Iran are unlikely to feature directly in this Spring Statement, they should not be dismissed entirely. The conflict reiterates the need to increase defence spending both in the UK and around the world and may prompt the Government to accelerate their stated commitment to raise defence expenditure over the coming years. 

“In the near term, heightened tensions will place upward pressure on oil prices. If sustained, this would feed through into higher inflation, both domestically and internationally. At the margin, that combination of inflationary and spending pressures could push UK bond yields higher, eroding any emerging fiscal headroom that the Chancellor may have believed was available ahead of the Spring Statement.

“The Chancellor has been keen to set expectations that this will be a low‑key event, with little in the way of major policy change. Increased geopolitical uncertainty strengthens the likelihood of this and may also provide foil to backbencher pressure she might have otherwise received following last week’s by‑election defeat.

“From an investment perspective, however, the guidance remains unchanged: keep calm and carry on. Although geopolitical flare‑ups create short‑term volatility, history suggests tha