Escalating tensions in the Middle East have unsettled financial markets, as the threat of prolonged disruption to energy supplies has pushed oil prices sharply higher and reignited concerns about inflation. That has prompted investors to rethink the path for interest rates, with expectations shifting away from cuts and towards the possibility of further increases if price pressures worsen.
In the UK, that shift has driven gilt yields higher, adding pressure to borrowing costs across the economy while also improving returns on products linked to bond markets, such as annuities.
Experts are reacting to the news below:
Derren Nathan, head of equity research, Hargreaves Lansdown:
“The FTSE 100 is set to open down after a weekend of heightened military action and rhetoric in the Middle East. The US President has given Tehran until the end of today to reopen the Strait of Hormuz or risk strikes on the country’s power generation facilities. So far, there have been no signs of Tehran backing down, but international diplomatic efforts, including a late-night Sunday call between Donald Trump and Sir Keir Starmer, have intensified in an attempt to avoid further escalation.
On the domestic front, Wednesday’s UK CPI inflation reading for February will be a key data point for rate setters and markets. The numbers predate the recent oil shock and forecasts, but comments by the Bank of England suggest that continued high services inflation is likely to keep the number close to January’s 3.0% read out. Easier comparisons and the fiscal tightening seen in the 2025 Budget had been expected to see second quarter CPI inflation fall towards 2.1%, but higher fuel prices are now expected to see the average of the next three months stay at around 3%. That’s seen discretionary sectors underperform so far in 2026, partially offset by stronger performances in Oil & Gas, Electricity and Aerospace and Defence.
US stock futures are also down, taking a lead from the Asian and European exchanges. In a reversal of trends of recent years, US markets have underperformed global indices so far this year, with value strategies holding up better than growth.
Although the S&P 500 is down around 5% year-to-date, there have been some pockets of strength, with the Oil & Gas and energy sectors unsurprisingly being the standout. Sticking with commodities, Basic Materials are in positive territory with defensive sectors such as Telecoms, Consumer Staples and Utilities also firmly in the green. Semiconductors stocks have also made gains so far this year. This typically cyclical sector is benefiting from the once in a generation pivot towards artificial intelligence. More broadly, cash-rich, cash-generative big technology companies look well placed to ride out economic challenges.
Brent Crude is currently trading at $113 per barrel but has bounced between $104 and $118 over the last 24 hours as traders continue to grapple with the standstill of shipping in the Strait of Hormuz, which typically transports 20 million oil equivalent barrels of hydrocarbons each day. The International Energy Agency is considering the release of further emergency reserves, but the effectiveness of this temporary measure is limited, with a swift end to hostilities in the Gulf remaining key to restoring stability. US crude inventories are one to watch after a surprise build last week, illustrating strength in America’s domestic energy supplies.”
Jonathan Raymond, investment manager at Quilter Cheviot:
“The latest bout of volatility reflects markets beginning to price in meaningful medium‑term damage to Western economies. The UK and Europe look more exposed than the US because of their reliance on imported energy, and that is now feeding into expectations of weaker consumer spending, softer growth and pressure on corporate earnings. Discretionary sectors in particular are struggling as investors reassess how resilient demand will be.
“Central banks are in a tough spot. They cannot afford to let inflation expectations drift higher, yet labour markets are already weakening and any further tightening risks amplifying that slowdown. The result is a policy backdrop that feels tougher than the data would normally warrant, which is amplifying the swings we are seeing across equity markets.
“For investors, periods like this are uncomfortable but not unusual. It is a good moment to check that portfolios still reflect long‑term objectives rather than short‑term market noise. For those with the ability and appetite to take a longer‑term view, volatility can create opportunities to add to high‑quality companies at more attractive valuations. Markets are repricing risk, not writing off the prospects for disciplined long‑term investors.”
Chris Beauchamp, Chief Market Analyst UK at investing and trading platform IG, said:
“UK rate expectations have been on a remarkable journey in barely a month, but a full 100bps rise in rates is now expected for this year. The bad news for consumers is compounded by dire news for the government, as the ten year yield tops 5%. A fiscal squeeze of dire proportions has exploded in a matter of weeks, but with more escalation expected in the Middle East, this may be just the beginning of the crisis.”
Susannah Streeter, chief investment strategist, Wealth Club
“Far from providing reassurance that the conflict could be resolved, Trump’s ultimatum to Iran over the Strait of Hormuz has sent another jolt of worry through markets.
The FTSE 100 has fallen sharply in early trade, down another 1.5% following on from Friday’s slide. Investors are fretting about the impact of a prolonged war on economies around the world. Wall Street is set to open lower as pessimism continues to spread. The war has become intractable, and any possibility of shipments resuming in a meaningful way through the vital waterway seems a dim and distant hope right now. Meanwhile, the threat of further long-term degradation of crucial energy infrastructure is looming.
Brent Crude shot up to $115 a barrel as traders assessed the hard yards needed before the Strait reopens. Tehran has threatened to wreak devastation on oil and gas facilities across the Middle East if the US carries out its threat to take out Iran’s power plants. Now the financial sector is in Iran’s sights, with a senior official warning that financial institutions holding Treasuries, US government bonds, could be hit, in an extension of strikes targeting US allies in the Gulf. Iran is a wounded bear, lashing out at an increasing number of targets in its fight for survival.
The International Energy Agency has warned that the world is facing its biggest ever energy shock, and economies are scrambling to limit the fallout. In the UK, Prime Minister Keir Starmer will chair an emergency COBRA meeting to assess the likely damage, having warned that energy prices are inescapable.
The repercussions look likely to include sharply higher borrowing costs for companies, consumers and the government. UK 10-year gilt yields have retreated a little after nudging 5% for the first time since the global financial crisis. Investors in UK government debt are reacting to expectations that the Bank of England may be forced to hike interest rates multiple times this year. Policymakers will want to stop the insidious creep of higher energy costs becoming embedded in prices across the economy. The government is in a tight spot: its interest repayments on debt are already onerous, limiting the fiscal firepower that can be deployed to help households and firms deal with potentially crippling bills. Other spending priorities may have to be reassessed, or fresh tax rises could be on the cards.
As inflation expectations are sharply reassessed, it’s putting gold under even more pressure. The precious metal has experienced a brutal drop as the conflict has escalated. Gold is usually seen as a safe haven in times of severe conflict, but a collision of factors is pushing down demand. Essentially, the opportunity cost of holding gold is mounting. As government bonds, in particular Treasuries, see yields rise, it makes gold less attractive given that gold pays no interest. Investors who have made losses elsewhere in volatile markets are selling to cover positions, while the strengthening of the dollar also makes gold more expensive for buyers in other currencies.”
Richard Carter, head of fixed interest research at Quilter Cheviot:
“Gilt yields have moved sharply higher as markets reassess the inflation outlook and push rate expectations upwards. Only a few weeks ago investors were positioned for cuts, yet the market is now pricing in around 1% of hikes this year. That swing underlines how quickly the inflation narrative has shifted, with higher energy prices and the prospect of greater fiscal intervention adding to the pressure.
“This episode is somewhat different to what we saw around the 2022 Ukraine crisis. Inflation had already been easing going into the Iran conflict, and interest rates are starting from a much higher level, which should reduce the need for the Bank of England to react as aggressively as it did then.
“Despite the volatility, starting yields look compelling. Ten year gilts above 5% and UK corporate bonds near 6% offer meaningful income for long term investors. But until there is some de escalation in the Middle East, bond markets are likely to stay under strain as geopolitical risk keeps inflation concerns alive.
“For households, the immediate impact is likely to be felt most clearly through borrowing and retirement products. Higher gilt yields tend to feed into mortgage pricing, especially for fixed rate deals and lenders may continue to edge rates higher if volatility persists. On the other hand, annuity rates generally move in line with gilt yields, so anyone approaching retirement could see further improvements in the income available.”
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