The market bellwether has spoken, and it is not good news. At 4:15 AM GMT, the Pentagon confirmed airstrikes on Iranian nuclear facilities, following the breakdown of Vienna negotiations. The immediate reaction in the futures pit was electric.
Brent crude surged 8% to $94.50 a barrel, the highest since November 2022. The RBOB gasoline contract jumped 6% on supply disruption fears.
This is precisely the sort of geopolitical risk that central bankers dread: a supply-side shock that feeds directly into headline inflation. The 10-year gilt yield has risen 12 basis points to 4.38%, as markets price in higher energy costs.
Sterling has taken a hit, falling 1.2% against the dollar to $1.2340.
The question for the MPC is whether this is a temporary spike or the beginning of a prolonged conflict. History suggests the latter. The 1973 oil embargo and the 1990 Gulf War both led to sustained price increases.
The Treasury will be watching the breakeven rates closely. If they rise, the case for rate cuts will evaporate. Meanwhile, the FTSE 100 has opened down 1.
8%, with airlines and transport stocks bearing the brunt. The CBOE Volatility Index has spiked 30% to 24.5.
This is a classic flight to safety. The dollar index has risen 0.8% as investors pile into US Treasuries.
The Bank of England faces a difficult choice: raise rates to tame inflation or hold steady to support growth. The fiscal hawks at the Treasury will be sharpening their knives. The Chancellor must resist the temptation to implement price controls.
They never work. Instead, allow the market to adjust. The oil shock will inevitably lead to higher petrol prices and domestic heating costs.
The real test will be the pass-through to core inflation. If this becomes a multi-month conflict, expect the MPC to revise its inflation forecasts sharply. The 2% target will feel very far away.
For now, the message is clear: buckle up. Volatility is back with a vengeance.
