In a development that underscores the volatility of Middle Eastern diplomacy, Donald Trump has told the BBC that Benjamin Netanyahu did not defy him, even as the White House scrambles to contain a spiralling crisis. The former president’s intervention, characteristically blunt and contradictory, adds a new layer of complication to an already combustible situation. Markets, as ever, will be watching the fallout for signs of a wider conflagration.
Let us be clear: this is not a simple denial. Trump’s statement comes amid reports that Netanyahu ignored US warnings before ordering a strike that has left the region on a knife-edge. The White House, for its part, is engaged in frantic damage control, trying to keep a lid on a conflict that threatens to draw in multiple actors. The language from Washington has been unusually sharp, but Trump’s remarks pour petrol on the fire.
The financial implications are immediate. Gilt yields have spiked on the uncertainty, with investors fleeing to the dollar as a safe haven. Oil prices are up 3% on the day, reflecting fears of supply disruptions. The pound is taking a hit, as is typical when geopolitical risk rises. The Bank of England will be watching nervously: any sustained increase in energy costs will feed through to inflation, complicating their already difficult balancing act.
But the real story is the breakdown in communication between the US and Israel. Trump’s claim that Netanyahu did not defy him is at odds with the facts on the ground. The White House has made it clear they were not consulted, and the implications are profound. If the special relationship can no longer be relied upon, the market’s risk premium for the region will rise. That means higher costs for everything from defence stocks to insurance.
This is the kind of crisis that exposes the folly of fiscal profligacy. The US and UK have both run up enormous debts during the pandemic, leaving little room for manoeuvre. If this situation escalates, central banks will be forced to choose between fighting inflation and supporting growth. A no-win scenario, as far as the markets are concerned.
Capital flight is already underway. The Swiss franc and yen are strengthening, while emerging market currencies are under pressure. This is the classic response to geopolitical shock: investors retreat to safety, and the cost of risk rises across the board. The question is whether this is a temporary blip or the start of a more sustained move.
For now, the market’s attention will be on the next White House press briefing. Any hint of further escalation, or of a rift with Israel, will be met with renewed selling. The gold price is already up 1.5%, a clear signal that investors are hedging against the worst. Meanwhile, bond markets are pricing in a higher probability of a rate hike to combat inflation, even as the risk to growth mounts.
In the end, this is a story about credibility. Trump’s denial may soothe some nerves, but it does not change the reality of a crisis that the White House is still trying to contain. The bottom line is this: when leaders contradict each other in public, markets lose confidence. And once confidence is lost, it is very hard to regain. The City will be watching the fallout with a wary eye, and the pound may find itself at the sharp end of the stick.
