The ramifications of the Middle East conflict spread to the markets this week, with fears over energy supplies and disruption in the Strait of Hormuz causing particular concern.
Both the FTSE 100 (^FTSE) and Nasdaq (^IXIC) tanked at the start of the week as traders rushed to make sense of the fast-moving conflict.
US president Donald Trump set out his reasoning for the attacks in a statement on Monday. “An Iranian regime armed with long-range missiles and nuclear weapons would be a dire threat to every American,” he said, without citing evidence of Iran’s nuclear capabilities.
Tensions further ramped after the US military torpedoed an Iranian warship, causing it to sink off Sri Lanka on Wednesday.
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Back in the Strait of Hormuz, the area had largely emptied out, particularly in the face of Iran’s threats to fire on any vessel than entered the territory. The area is a key transit route for moving millions of barrels of oil and other goods around the world.
Trump’s claim that the US would offer risk insurance and naval escorts for ships transiting the area has provided little comfort to those most affected. In a related development, the US cleared the way for India to temporarily increase its purchases of Russian oil.
Referencing the move, AJ Bell investment director Russ Mould said: “The US decision to give Indian refiners a 30-day waiver allowing them to buy Russian oil suggests any solution to the blockage of the Strait of Hormuz is unlikely to happen overnight.
The longer that key energy infrastructure and shipping routes in the region are affected, the greater the chance of a significant inflationary impact. This, in turn, could translate into higher interest rates over the medium term, which is typically bad news for equity markets.
Still, as Mould noted: “Markets displayed resilience in the face of events in the Middle East, with the FTSE 100 ticking higher on Friday.”
Read more: Why the FTSE offers a defensive play amid Iran conflict volatility
While it was always pegged as being considerably less of a significant budget announcement than that in the autumn, events in the Middle East overshadowed UK chancellor Rachel Reeves’ spring statement in which she defended her economic plan as being the “right one”.
Just days after the US and Israel launched the attacks on Iran, she used her speech on Tuesday to pledge that the government would chart a course through uncertainty, while pointing to easing inflation and lower borrowing costs as evidence that household pressures are starting to ease.
