The City woke to a jolt this morning. Oil prices spiked 5% in early Asian trading after Iran launched a direct military strike on Israel. Brent crude breached $92 a barrel, a level not seen since October last year.
The Strait of Hormuz, through which 20% of the world’s oil passes, is now a geopolitical flashpoint. Iran’s message is clear: it can weaponise its energy reserves. And the market is listening.
Yields on 10-year gilts fell 12 basis points as investors fled to safe havens. The dollar strengthened, punishing emerging market currencies. The fiscal arithmetic is grim.
Higher oil prices feed inflation, forcing central banks to keep rates higher for longer. The Bank of England, already wrestling with sticky services inflation, now faces a fresh supply shock. This is not 1973, but the parallels are uncomfortable.
Iran’s resilience is built on decades of sanctions-busting and a network of shadow tankers. They can sustain a conflict longer than many assume. For investors, the bottom line is volatility.
The VIX, Wall Street’s fear gauge, jumped to 22. Portfolios need hedging. Energy stocks surged, but bonds are at the mercy of a central bank that can’t afford to blink.
The market is pricing in a 20% probability of a full-blown regional war. That might be optimistic. Fiscal responsibility is the first casualty of conflict.
Governments will borrow more, printing money to fund defence. The UK’s debt-to-GDP ratio, already above 100%, will swell. And the pound?
It’s caught between a hawkish BoE and a flight to the US dollar. Sterling fell 0.8% against the greenback.
This is a classic capital flight scenario: out of risky assets, into dollars and gold. Gold surged to $2,380 an ounce. The message from Tehran is loud and clear: they have the oil, and they are not afraid to use it.
The market must now price in a new risk premium. Every diplomatic channel is being tested, but for now, the trajectory is toward higher inflation, tighter monetary policy, and a stormy summer for global markets.
