Top stories
- Once again, the Middle East has topped the headlines following further attacks on shipping in the Strait of Hormuz earlier in the week. The US responded with airstrikes on over 80 targets in Iran on Tuesday night, and a further 90 targets on Wednesday night. Iran retaliated against US assets in Kuwait, Bahrain and Qatar. Tehran’s main command centre stated, “under no circumstances will we allow any interference in the affairs or management of the Strait of Hormuz”. It also said that Iran’s designated route was the “only safe passage” for commercial vessels and tankers through the Strait. Bloomberg reported that the number of ships attempting to transit the Strait has dwindled, with the route close to Oman threatened by Iranian attacks.
- In addition, the US Treasury revoked a temporary licence allowing Iran to sell its previously-sanctioned oil. Iran said the attacks and the sanctions decision violated the ceasefire agreement signed last month and vowed a response, which was followed by attacks on US bases in Kuwait and Bahrain. At the NATO summit in Ankara, Türkiye, President Trump said “for me, I think it’s over… as far as I’m concerned it’s just a waste of time”. Trump criticised Iran’s leadership and said that he wouldn’t stop US negotiators from continuing to engage, but expressed pessimism, saying “they can talk, but I think they’re wasting their time”. Ceasefire talks between the countries have been paused while Iran holds a mass funeral for Supreme Leader Ali Khamenei, who was killed at the start of the conflict.
The minutes of last month’s Federal Reserve meeting were released and cast a little more light on the first meeting of the Kevin Warsh era. While most committee members agreed that inflation would cool as the impact of higher energy costs and one-off tariffs eased, there were concerns over persistent underlying price pressures. Members pointed to a scenario where the labour market remained stable due to AI fuelled demand while the effects of the Middle East conflict and tariffs keep prices elevated. The minutes stated that in such a scenario “almost all of these participants indicated that some policy firming would likely be warranted to return inflation to 2%”. The supply squeeze driven by AI capex was referenced, as “many participants noted that ongoing strong demand for AI infrastructure would likely sustain upward pressure on prices for technology products and electricity”. There was also concern that consumers and business are expecting higher prices.
- The International Monetary Fund issued its World Economic Outlook Update, saying that, while the global economy had weathered the conflict in the Middle East, the risks of fresh hostilities “loom large”. The IMF expects global growth to retreat from 3.5% in 2025 to 3% this year, marginally weaker than its previous forecast, with a recovery to 3.4% in 2027. Inflation is expected to climb from 4.1% in 2025 to 4.7% this year, before easing to 3.9% in 2027. The IMF noted that “the most imminent risk” to the global economy “stems from developments in the Middle East” and that a “re-escalation of geopolitical tensions would hurt growth and compound inflationary pressures”. The IMF said that the relative resilience of the global economy so far stemmed from the boost from the AI boom offsetting the drag from the Iran war. But the IMF stressed that much of the strength in global growth stemmed from a handful of economies, including Taiwan, South Korea, Thailand and Malaysia, which are exporters of AI-related equipment.
Market movers
Would anyone like to buy 63 million barrels of oil? There is a huge amount of Iranian oil in limbo now following the removal of the US licence allowing the sale of Iranian oil, which formed part of the interim peace deal. The oil is on vessels in the Persian Gulf and Indian Ocean, and the majority of ships have no destination or are indicating they are available for orders. The removal of sanctions and lifting of the US blockade had led to a surge in supply from Iran, which along with other supplies leaving the Gulf, had suppressed oil prices, at least until tensions ramped up again this week.
The investment lens
Are we on the brink of a return to conflict in the Middle East? Markets have certainly taken some fright at Trump’s comments that the ceasefire is over. Investors now need to decide if renewed attacks are simply a part of the negotiations or if Trump has abandoned the peace talks for now.
The passage to a permanent peace deal was never likely to be completely smooth, given the level of mistrust between the two sides, but Trump has shown significant reluctance to re‑escalate the conflict, issuing only limited reciprocal attacks over the past few months. Iran’s insistence on control of the Strait of Hormuz appears to be the underlying cause of the current escalation in tensions and this week’s round of strikes and retaliation.
The spike in tensions comes at a time when talks are on hold due to the funeral of Iran’s former Supreme Leader Ali Khamenei, and come before what is expected to be the more complex phase of negotiations around a settlement for Iran’s nuclear program. The US revocation of the temporary licence for Iran to export oil will have an impact, and higher tensions are already being reflected in the oil price climbing from recent lows, after having briefly fallen below pre-war levels. The oil price, still below $80 per barrel at the time of writing, is still a long way from levels seen in March and April, when oil was trading close to $120 per barrel.
Higher oil prices and concerns over further disruption to supply are pushing up inflation and interest-rate expectations, and weighing on overall market sentiment. However, Trump’s comment that the ceasefire is “over” is not the same as moving back to a full-scale conflict, and if we see talks restored between the two sides in the coming days then tensions may ease. All the same, the events of this week serve as a reminder that in the absence of a full peace deal, more attacks, both military and verbal, are likely, and they will continue to impact financial markets and sentiment.
