Middle East Update
Following several weeks of escalating tensions in the Middle East, today President Trump instructed the Pentagon to pause military strikes for 5 days citing “productive discussions” with Iranian leaders. The situation remains somewhat unclear, however, as Iran issued a statement denying these talks. Nonetheless, stock and bond markets, which have fallen sharply since the turn of the month, welcomed the news and jumped in response.
Tensions between the US, Israel and Iran escalated over the first 3 weeks of March with attacks on energy infrastructure in Iran and across the Gulf region is pertinent for markets. Crucially, there has been huge disruption in the Strait of Hormuz where Iran has essentially halted the transit of a significant share of the world’s oil, gas, and fertiliser supply and has led to a spike in prices for these critical commodities. In turn, the market expectations of inflation rose sharply, and concerns grew over the economic impact of a prolonged disruption. An elongated conflict risks a shock, not just to fuel prices, but also to a wide range of input costs across manufacturing and food supply chains which would weigh on consumer budgets and corporate profits globally.
During this short period, at first glance it is hard to find winners in asset markets beyond the commodities impacted by the restriction of movement through the Strait of Hormuz. Bonds fell, and yields rose, as higher inflation expectations eroded demand for fixed coupon investments. US 10-year yields approached the levels that catalysed Trump to pivot on tariffs in April 2025 while UK Gilt yields increased to the highest level since 2008. With so much government debt, the US and UK can ill afford the expense of elevated bond yields. Stocks fell as investors built in concerns over the adverse impact of higher energy prices and potentially higher interest rates on consumers and businesses. Markets most exposed to energy import costs (such as Europe, Japan and India) fell most aggressively. Even precious metals, which are typically resilient to geopolitical shocks, tumbled. It has been a very short period, but some investors will have sold their assets because raising cash from these assets that have performed extremely well is relatively palatable – this also happened during the Covid triggered market decline in early 2020. The picture over this short timeframe is somewhat bleak but it has not all been bad news. With granular implementations we can find some resilient assets – short-dated inflation-linked bonds have benefitted from higher inflation expectations, floating rate bonds have not been impacted by rising interest rates and appreciation of the US dollar has helped US allocations for Sterling investors.
Today, there was better news as President Trump instructed a pause on military strikes for 5 days citing “productive discussions” with Iranian leaders. Stocks and bonds have jumped from recent lows and oil has fallen back below $100 per barrel. There are several reasons that the US may be looking for an offramp. Ongoing tensions are unpopular with international friends, particularly Gulf nations being targeted by Iran. Rising bond yields push up interest expense on an already huge government debt burden. Finally, high fuel prices are extremely unhelpful for the administration ahead of the summer driving season and November mid-term elections.
Bottom line
Iranian officials have so far denied that there has been any breakthrough, and, in any case, the pause announced by Trump is conditional on continued progress, meaning strikes could resume at any point if negotiations stall. Therefore, the path may continue to be volatile and maintaining diversification, liquidity and discipline remain key. We are continuing to monitor the situation and assess opportunities that may arise as the outlook evolves.
