The Commander in Chief has fired his opening salvo. Donald Trump is demanding Congress unlock billions of dollars for military action against Iran, and Whitehall’s defence establishment is scrambling to calculate the cost of a Gulf escalation. This is not a drill. This is a market moving event.
The request, delivered via a leaked memo from the Pentagon, seeks a supplemental appropriation of $45 billion to fund 'enhanced operations in the Persian Gulf'. It comes complete with a timeline for potential strikes on Iranian nuclear facilities and a contingency for a full blockade of the Strait of Hormuz. For the bond markets, this is the equivalent of a credit downgrade on global stability.
Let me be clear. The fiscal arithmetic is brutal. The United States is already running a deficit of over $1 trillion. Adding another $45 billion in emergency spending, while the economy is still digesting the tariff shock, is like throwing a bucket of petrol on a smouldering fire. The yield on the 10-year Treasury has already ticked up 12 basis points this morning. Investors are demanding a risk premium for holding Uncle Sam’s paper. If this turns into a prolonged engagement, we could see gilt yields in London follow suit. The Bank of England will be watching nervously.
But the immediate concern is the Strait of Hormuz. A blockade would choke off 20% of the world’s oil supply. Oil prices have already spiked above $90 a barrel. If that goes to $120, the UK is looking at a double digit inflation print. The Chancellor will have to choose between letting inflation rip or raising taxes. Neither option is palatable.
The defence planners in Whitehall are now modelling three scenarios: a short air campaign, a prolonged ground war, and a full regional conflagration. The Ministry of Defence has already activated the Joint Contingency Planning Staff. They are calculating our exposure. The Royal Navy has two frigates in the Gulf. The US has asked for basing rights at Diego Garcia. That request is being reviewed with extreme caution.
There is also the capital flight angle. Wealthy Gulf investors have been significant buyers of UK real estate and gilts. If the Gulf becomes a warzone, that capital will flee. But it won’t come to London if the UK is seen as complicit in American adventurism. The pound is already sliding against the dollar. It dropped 0.8% in early trading. This is precisely the kind of geopolitical shock that can trigger a sterling crisis.
The City is pricing in the worst. Defence stocks are up, but airlines and travel are getting hammered. British Airways parent IAG is down 5% as oil costs surge. Meanwhile, gold is pushing towards $2,000 an ounce. The classic safe haven play. But this crisis is different. Gold is not going to protect you from a spike in inflation caused by energy disruption.
The bottom line is this: Congress has the purse strings. Nancy Pelosi has already indicated that any new funding request will be subjected to 'rigorous scrutiny'. But Trump has the bully pulpit. He can frame this as a question of national security. If he goes to the American people and says 'Iran is building a bomb', the political calculus changes. The markets hate uncertainty. And right now, uncertainty is the only certainty.
For UK investors, the message is clear: reduce exposure to oil sensitive sectors, hedge your currency risk, and brace for volatility. This is not a drill. This is a test of fiscal discipline in the age of populism. So far, the markets are not impressed.
