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Repeated shifts in US deadlines and rhetoric have driven sharp swings in oil, equities and bonds. While headlines continue to change, markets are focused on two areas:
- Energy supply risk remains elevated while the Strait of Hormuz is not fully secure. Policy uncertainty is prolonging volatility, even as investors look for signs of an ‘off‑ramp’.
- Oil prices have stabilised for now around $100/barrel for Brent, materially above pre‑conflict levels and still carrying a geopolitical risk premium. This price point is already feeding into inflation expectations, sentiment indicators and forward growth assumptions.
By the numbers
3.0% – UK inflation in February which was unchanged, as expected. Core CPI (which excludes food and energy) increased to 3.2% from 3.1% in February, higher than expectations of 3.1%. Services inflation eased to 4.3% year on year, the lowest level since March 2022. The data feels stale given the moves in commodity prices after the data was compiled. The Bank of England expects CPI to be close to 3.5% in March pushed higher by fuel prices followed by further rises when the energy price cap is updated in July.
3,200 – the number of ships currently ‘stuck’ in the Gulf, according to the Financial Times. 22 vessels have been struck by Iran since 28 February. Disruption in the Gulf continues to constrain energy and trade flows. Even if hostilities ease, uncertainty around shipping routes is likely to persist and keep a floor under oil prices.
8,000 – the approximate number of additional troops travelling to the Middle East from various US bases around the world. Rising US troop presence increases the probability of escalation as well as the incentive to push for a negotiated outcome—both outcomes remain plausible.
Market response
Markets continue to react quickly to changes in tone rather than fundamentals:
- Equities: Sharp intra‑day reversals reflect headline sensitivity rather than improved growth prospects.
- Bonds: Safe‑haven flows have been intermittent, with inflation risks capping bond price rallies.
- Commodities: Oil has re‑priced structurally higher, and volatility remains elevated despite recent stabilisation.
Recent PMI data points to softening demand and rising input costs across major economies. While activity remains marginally expansionary, the direction of travel suggests the economic effects of the conflict are beginning to emerge.
The investment lens
From an investment perspective, the moving deadlines are less important than the range of realistic outcomes now facing markets:
- A negotiated de‑escalation would likely allow oil prices to fall back toward the $80–85/barrel range currently implied by futures markets. That scenario would ease inflation risks and support a more constructive outlook for growth assets.
- Further escalation, particularly involving energy infrastructure, would embed higher oil prices for longer—raising inflation expectations and increasing downside risks to equities and fixed income simultaneously.
While the US and its allies retain clear military superiority, this does not translate into a clean economic resolution. Securing freedom of navigation in the Strait of Hormuz is operationally complex, and even a formal end to hostilities would not immediately remove supply or insurance constraints.
Portfolio implications
- Energy risk remains: The upside risk to oil prices is larger and quicker than the downside, favouring caution around inflation‑sensitive assets.
- Volatility is likely to persist: Rapid shifts in sentiment argue for resilience over precision timing.
- Diversification matters: Assets with inflation‑linkage and real asset exposure continue to play an important role in portfolios.
- Policy expectations are vulnerable: Central banks face renewed inflation uncertainty, reducing confidence in near‑term rate cuts.
In short, while oil prices have paused near $100/barrel, until there is clarity on shipping security and energy supply, markets will remain vulnerable to renewed swings in both directions.
