In a sharp departure from the usual transatlantic solidarity, Vice President-elect Vance has publicly criticised Israeli Prime Minister Benjamin Netanyahu’s tactical decisions, calling them “strategic missteps” that undermine long-term stability. Speaking at a security forum in Washington, Vance argued that Israel’s current military approach in Gaza risks alienating moderate Arab states and prolongs the very instability it seeks to quell. “You cannot bomb your way to a sustainable peace,” he declared, a sentiment that will resonate with fiscal hawks wary of endless defence spending.
Meanwhile, Downing Street has doubled down on its support for a two-state solution, reiterating that a negotiated settlement remains the only viable path to lasting peace. The Foreign Office emphasised that Britain’s position is unchanged: Israel’s security must be guaranteed, but so must Palestinian statehood. This diplomatic friction comes as markets eye the region’s volatility with unease.
Gilt yields have ticked higher this morning, reflecting investor caution over the potential for broader conflict. The cost of military operations is always a hidden tax on future prosperity, and any escalation would only deepen the red ink. Capital flight from emerging markets in the Middle East has accelerated, with investors seeking refuge in U.
S. Treasuries and gold. The bottom line is clear: geopolitical instability is a drag on growth, and central banks will be forced to keep rates higher for longer if uncertainty persists.
The Bank of England’s Monetary Policy Committee faces a delicate balancing act, as higher defence spending crowds out productive investment. Meanwhile, the eurodollar market is pricing in a risk premium, and the pound is feeling the pressure. For the City of London, the Vance-Netanyahu spat is more than diplomatic theatre.
It signals a potential shift in U.S. foreign policy towards a more transactional approach, which could strain longstanding alliances.
Investors should brace for a bumpy ride. As the old saying goes, when geopolitics turns sour, the market’s risk appetite turns sour too.
