Iran: Stepping back, seeing the bigger picture…

What is the bigger picture with this war on Iran that has roiled markets, spiked energy prices, monopolised the news flow and increased worries about inflation finally catching up with America’s trade wars?

1. Markets are functioning normally
2. The shipping markets are adaptable

One, the US-Israel attack on Iran and the de facto closing of the Straits of Hormuz, which has led to energy prices rising sharply, constitute a geopolitical crisis, not a financial one. Reiterating our point from last July, geopolitical crises may have short-term adverse effects on risk assets, but not long-term.

Why? Because they don’t impede the normal functioning of financial markets. And where financial markets function normally, they find ways to balance and mitigate risk, even if they need the help of central banks.

Meanwhile, they all still rest comfortably at valuations that are double-digit above their long-term averages.

Europe might have been hit the hardest, to be sure, but that’s down to three reasons:

• The European energy market is heavily dependent on Liquified Natural Gas (LNG) imports, and with prices spiking across the board, it could cause issues for households and factories.
• That European equities may be attractive in a Dollar-sell off trade, but once investors rushed back into the greenback, that trade naturally unwound.
• That we are into the second year of EU outperformance, a rarity in the last three decades, which naturally made some investors want to take some profit off the table.

Let’s take a look at bonds. Higher oil prices have caused bond yields to rise. This is happening because some inflation is being priced in, and some rate cuts are consequently priced out.

But it’s not all bad news. While bonds didn’t act as safe havens, mostly because rate expectations shift, the US yield curve is not steepening but flattening, which means that short-term rates are climbing faster than long term rates. While this is a highly technical issue, the move essentially means that markets are pricing fewer rate cuts (the short-end move), but they still trust central banks to fight inflation (which is why long-term rates didn’t shoot up).

Thus, apart from oil prices, there’s no need to panic. Which brings us to the commercial and geopolitical realities of the issue. It all boils down to one issue: how long can this turbulence last? After all, markets sold off when the US President declared that bombings could last for weeks.

Iran remains in relative international isolation, without strong and reliable allies both operationally and ideologically. Such structural isolation has a direct impact on the overall probability of escalation beyond Iran and its associated groups, like Hamas and Hezbollah. The former is already significantly handicapped, whereas the latter faces growing political and institutional pressure at home.

Maritime transits via the Strait of Hormuz, through which 20% of the world’s oil supply passes, have become significantly more hazardous. Consequently, there have been short-term disruptions in overall volumes. Oil transits do not follow set routes, or buyers. It’s a highly dynamic industry with experienced professionals whose expertise in navigating high geopolitical risks has been well established for a long time. Insurance policies have also been highly dynamic and historically plenty of firms have been willing to underwrite contracts even during war.

The most probable outcome is a difficult and gradual compromise for the Iranian regime, one that may alleviate immediate escalation risks but could weaken its economic and strategic position over the medium term.

Vessel operators have historically demonstrated an ability to operate in high-risk environments, provided the risk/reward profile is attractive. Thus, we anticipate short-term volatility and pricing dislocations; however, our base case scenario is not one where the Straits of Hormuz remain essentially closed for a protracted period of time.

Iran’s economy does not have the resilience required to sustain a protracted, high-intensity conflict. Its public revenues are heavily dependent on oil exports. China, an important consumer of Iranian oil (1.4 million barrels per day), has a vested interest in ensuring open sea lanes. However, should the Revolutionary Guard choose to ignore this, Iran risks alienating an important customer while limiting its ability to export.

Even if the Strait formally remains open, increased surveillance and enforcement in the region will have a material impact on Iranian exports, a portion of which are indirect and/or opaque, including re-routing and re-labelling.

Conclusion

From a market and economic perspective, reactions so far are well within the realm of what’s anticipated. Despite some sharp equity sell-offs, we haven’t seen anything to suggest a crisis-like market malfunction. We will continue to monitor but remain broadly positive over the long term.

In terms of geopolitics, although a fundamental change in the Iranian regime, now in its fifth decade of institutional continuity, is not likely except through direct military intervention, the prolonged closure of the Strait of Hormuz is likewise difficult to justify under current economic and geopolitical realities.

 All returns in GBP to Friday Close (as of Friday 6 March)

Market update

Markets sold off last week on rising geopolitical tensions in Iran, which drove the oil price up by more than 35.6% to $90 per barrel (as of Friday 6 March). Market fears centred around the risk of a closure to the Strait of Hormuz – a major sea passage for the world’s oil and liquefied natural gas trade. Dollar-based assets fared best in the ensuing flight to safety, as US stocks fell by just -2.0% in USD terms, while UK, European, and Emerging markets stocks all fell by over -5% each in local currency terms. The dollar strengthened against most major currencies, rising by +1.7% and +1.1% against the Euro and Yen, and by 0.5% against the GBP.

Government bond yields increased across developed markets, with 10-year yields in the US, UK and Germany rising by +19bps, +40bps and +21 bps respectively as fixed income markets priced in higher expected inflation. Gold, which is normally considered a safe-haven asset, fell by -2% over the week – this may have been a reaction to higher rate expectations, as this increases the opportunity cost of holding a non-yielding asset like gold.

Macro news

UK spring budget

The UK Spring Budget emphasised economic stability with no major new tax or spending measures. The OBR trimmed its 2026 growth forecast to 1.1% (from 1.4%) but slightly raised projections for 2027–28 to 1.6%. Inflation is expected to ease steadily, falling from 3.4% in 2025 to 2.3% in 2026 and reaching the 2% target from 2027. Government borrowing is now projected to be nearly £18 billion lower than in the autumn outlook, with net borrowing expected to drop from 4.3% of GDP this year to 1.8% by 2029–30. Unemployment is forecast to peak at 5.3% in 2026. The government also highlighted a major defence investment, including £650 million to upgrade Typhoon fighter jets.

Economic repercussions of the ongoing conflict in Iran.  

Global energy supplies have been significantly threatened, reigniting fears of a "second wave" of inflation. The most immediate economic impact is the disruption of the Strait of Hormuz, a critical chokepoint through which approximately 20% of global oil and liquefied natural gas passes. In the weekdays since the conflict began, Brent crude prices surged as much as 35.6%, briefly crossing USD 90 a barrel, while UK benchmark gas prices doubled following production halts by QatarEnergy. A prolonged conflict pushing oil toward USD 100 or USD 120 a barrel could add between 0.4% and 1% to headline inflation in the US and UK, potentially forcing central banks to pause planned interest rate cuts.