Market Flash: Middle East Conflict Update

Markets have now had several days to digest the evolving conflict in the Middle East. While the geography of attacks continues to widen, with air defences intercepting missiles across multiple countries, the intensity of Iran’s ballistic missile launches appears to have slowed, according to Western officials and reporting. Even so, the critical Strait of Hormuz remains effectively unnavigable owing to the threat of attacks and escalating insurance costs.

Market reaction – to 4th March close

• Global equities are down 1.9% this week. However, US equities are up around 0.5%, supported by a strengthening US dollar and the US’s position as a net exporter of oil and gas.
• European and UK markets have been weaker, down 4.5% and 3.2% respectively. The UK’s relatively high allocation to the energy sector has helped it outperform continental European indices.
• Asian markets have seen the highest volatility, especially nations that are reliant on energy imports. South Korea, for example, saw a 20% drop in two days before rebounding by 10% on Thursday (5th March).
• After initially proving resilient, government bond yields rose, leading gilts to fall by around 1%. Gold also provided initial support but is now around 2% down on the week.

Market and Economic Outlook

Beyond the immediate market volatility, the key driver of any sustained market impact remains the path of energy prices and any feed-through to inflation and economic growth. 

Brent crude oil prices have stabilised in the $80-83 range, up from $70 on 27th February. This implies investors are still expecting a relatively short-lived disruption which may have a small but not significant impact on inflation. A change in view towards more sustained disruption would see oil prices rise further still. For Europe and the UK specifically, the near doubling of natural gas prices will be more concerning and reflects how vulnerable the gas market is to transport constraints and limited spare supply. British energy retailers are already withdrawing fixed-price tariffs in anticipation of higher wholesale prices.

Market volatility may still spike as events develop, especially if it looks like a short-term energy production disruption turns into something more long lasting. We remain comfortable with our portfolios and take particular comfort from the diversification achieved via our infrastructure holding. That said, we remain vigilant to these risks and continue to monitor the performance of our portfolios and underlying funds on a daily basis.

Risk warning

Hymans Robertson Investment Services LLP (HRIS) - all rights reserved, disclosures, caveats and limitations. Hymans Robertson Investment Services LLP is authorised and regulated by the Financial Conduct Authority (reference number 927111). Registered in England and Wales OC431334.

This document is for intermediaries to be used for information purposes only. It does not constitute an offer or solicitation to invest, it is not advice or a personal recommendation nor does it take into account the particular investment objectives, financial situation or needs of individual clients. Whilst HRIS uses reasonable efforts to obtain information from sources which it believes to be reliable, HRIS makes no representation that the information in this document is accurate, reliable or complete.

The value of your investments and the income from them may go down as well as up and neither is guaranteed. Investors could get back less than they invested. Past performance is not a reliable indicator of future results. Changes in exchange rates and/or tax rates may have an adverse effect on the value of an investment.