Over the weekend, the US and Israel launched military strikes against the Iranian Islamic regime’s military and weapons infrastructure. Their goal is to destroy the regime’s ballistic missile and aerial defence capabilities.
The Iranian head of state, Ayatollah Ali Khamenei and an estimated 40 of his key leaders were killed in an early strike on their main compound. The air strikes follow weeks of negotiations aimed at limiting Iran’s nuclear
capabilities and an extensive build-up of American military assets in the Middle East.
Iran has responded with missile attacks on Israel, the US and the UK military bases in the Middle East, including Cyprus, and America’s allies, including Qatar, Kuwait, the United Arab Emirates (UAE) and Saudi Arabia. Oil and gas infrastructure has been a particular target, and Iranian attacks on shipping in the Strait of Hormuz have temporarily closed this important major sea route through which approximately 20% of all global oil and gas exports pass.
What happens next?
The situation is very volatile, and more countries are being dragged into the conflict. Despite the death of Ayatollah Khamenei, Iran’s military response has continued without interruption as their leaders have vowed to
retaliate with force. US President Trump said the bombing campaign could continue until the Iranian people rise up and there is regime change. However, there has been a mixed response in public support among US voters, and this may limit how long the US is willing to maintain its military operations.
Impact on markets
The closure of the Strait of Hormuz and Iranian attacks on Middle East energy infrastructure have driven up energy prices. Brent crude rose to $82 per barrel on Monday, up from $71 at Friday’s close. Heating oil jumped 14%, and European natural-gas prices climbed 50%. Equities fell as markets reopened after the weekend.
Many Asian and European markets declined between 2% and 3%. However, energy, defence and shipping stocks rallied. Maersk gained more than 5%, and Shell, BP and TotalEnergies rose by a similar margin. Defence names were mixed: BAE Systems rose 6.6%, but Rheinmetall fell 3.5%. European airlines, banks and hospitality stocks declined sharply. IAG, the owner of British Airways, fell 8.9%, and Air France-KLM dropped 7%. US
markets have also started the week on the back foot.
The conflict has driven up some haven assets, with gold gaining 2%, and the US dollar has strengthened against most major currencies, including sterling, as investors move into US Treasuries.
Inflation effect
Inflation in the US and UK has been slowing for the past six months after accelerating last summer, and European headline inflation has recently fallen below its 2% target. However, oil and gas prices have risen sharply in the last few days, and this could reverse this downward trend if the fighting drags on. This has also had a negative effect on the UK’s borrowing costs, which will be a blow for the Treasury due to the high level of UK debt.
For individuals, inflation is likely to show up first in petrol prices. Domestic energy bills could potentially rise unless the conflict ends swiftly. If fighting drags this also increases the potential for inflation seeping into the price of goods if energy costs for manufacturing and distribution increase.
There are also wider inflationary pressures from the conflict, as the cost of insuring shipping has significantly increased due to the conflict. The implications for financial markets and the outlook for inflation will depend on the duration and scope of the conflict. The situation is evolving rapidly, and we continue to monitor financial markets to assess the impact on our portfolios.
Our advice
Our portfolios contain a broad range of asset classes designed to minimise volatility and, therefore, there is no need to panic. The headline value of our portfolios is likely to be affected in the short-term, but your portfolios have been designed with a medium to long term investment horizon. Therefore, we recommend you sit tight and do nothing, but if you want to talk to your financial adviser, please do not hesitate to contact them.