The US House of Representatives has passed a war powers resolution aimed at constraining military action against Iran. For the first time in recent memory, Congress has formally invoked the 1973 War Powers Act to limit the President's ability to strike Tehran without explicit approval. But while the move signals diplomatic restraint, backed by London’s cautious overtures, the markets are treating it with a weary shrug. The FTSE 100 barely flickered. Why? Because the real battle is not on the battlefield. It is in the bond market. And the enemy is not Iran. It is fiscal profligacy.
Let us cut through the geopolitical noise. This resolution is largely symbolic. It will face a certain veto from the White House, and the President has made clear his disdain for congressional meddling. Yet the signal matters. It suggests that the appetite for another Middle Eastern quagmire is thin. That is good for oil prices, which have drifted lower on the prospect of reduced supply disruption. But it is bad for the defence sector. Lockheed Martin and BAE Systems will be watching nervously. War is good for business. Restraint is not.
What really caught my eye was the sterling gilt yield. It dipped 3 basis points on the news. A move that small tells you everything. The market is not pricing in a war premium. It is pricing in a recession premium. The real threat to the British economy is not Iranian missiles. It is the growing pile of government debt that looks increasingly unsustainable. The Chancellor’s fiscal headroom has evaporated faster than a cup of tea on a freezing London morning. And with the Bank of England still tightening, the cost of servicing that debt is rising.
Meanwhile, capital flight is the silent subplot. As tensions in the Gulf ebb and flow, money continues to flow out of emerging markets and into the safe havens of US Treasuries and German Bunds. The dollar remains king. Sterling? A damp squib. The pound has been range-bound for weeks, trapped between Brexit uncertainty and the spectre of a hung parliament. The Iran resolution does nothing to change that calculus.
Let us talk inflation. The oil price dip is a temporary reprieve. The real inflationary pressure is coming from domestic sources: rising wages, sticky services inflation, and the lagged effects of energy price shocks. The Bank of England will need to stay hawkish, even as growth falters. That is a recipe for a policy error. Either they tighten too much and tip us into recession, or they ease too soon and unleash another wave of inflation. Neither option is pleasant.
London’s backing of diplomatic restraint is the correct call. War is a fiscal disaster. The Iraq War cost the UK over 9 billion pounds and did nothing for our national security. But let us not pretend that peace is free. The cost of inaction, of allowing Iran to continue its nuclear programme, is a long-term instability that will eventually manifest in a risk premium on Middle Eastern assets. For now, the market is complacent. That complacency will not last.
The bottom line? The war powers resolution is a sideshow. The main event is the budget deficit. Investors should be watching the gilt auctions, not the headlines from Capitol Hill. And they should be preparing for a world where central banks cannot save us. Because when the next crisis hits, fiscal space will be non-existent. That is the true threat to your portfolio.
