The City of London woke up to a familiar jolt of anxiety this morning as the White House signalled another round of military action against Iran. President Trump, never one for restraint, has vowed to hit Tehran ‘hard’ again today, prompting an unusually blunt warning from Downing Street. The message is clear: this escalation is a gamble with global markets as the collateral.
For those of us who remember the oil shocks of the 1970s, the pattern is distressingly familiar. A geopolitical flashpoint, a spike in crude futures, and a flight to safe havens. This time, however, the stakes are higher. The US dollar is already under pressure from a ballooning fiscal deficit, and another conflict in the Middle East risks sending inflation expectations through the roof. The Bank of England, already grappling with sticky price pressures, would be forced into a tighter corner.
Gilt yields have already crept up in early trading, reflecting a risk premium that investors are demanding for holding UK debt. The yield on the 10-year benchmark is flirting with 4.5%, a level that historically spells trouble for growth. If this confrontation escalates into a full-blown crisis, expect a sharp repricing of sovereign risk. The Treasury will not thank the White House for making its borrowing costs even more painful.
Meanwhile, capital is flowing out of emerging markets and into gold, which has breached the $2,000 mark again. The irony is not lost on me: the very administration that promised to lower oil prices and rein in inflation is now sowing the seeds of the opposite. The Iranian rial has already collapsed, but that is small comfort when the contagion risk spreads to the Gulf states.
The British warning is not just diplomatic posturing. It reflects a deep-seated fear that the US is losing its role as the responsible hegemon. When the world’s largest economy decides to ‘shock and awe’ without a clear exit strategy, the cost falls on everyone else. UK pension funds are heavily exposed to US treasuries, and any disruption to that market would be catastrophic for retirement planning.
Let me be clear: I am not a pacifist. There are times when military action is necessary. But the language coming from Washington suggests a policy of retaliation rather than strategy. The market hates uncertainty, and this is uncertainty on steroids. The VIX, the fear gauge, is already up 12% in pre-market trading.
For the average Briton, the impact will be felt at the petrol pump and in the cost of imported goods. The pound is vulnerable to a sudden loss of confidence, and the Bank of England may have to intervene with emergency rate hikes. That would be a bitter pill for an economy that is barely growing.
In conclusion, the City is watching this with a sense of dread. The last time we saw such brinksmanship, the result was a prolonged period of stagflation. The Chancellor must be preparing contingency plans. As for investors, the advice is simple: diversify, hedge, and brace for volatility. The bottom line is that when the superpower strikes, the markets bleed.
