Emma Wall, Chief Investment Strategist, Hargreaves Lansdown
“Escalating conflict in the Middle East saw market losses across the globe yesterday – and early trading suggests a mixed picture today.
Oil prices reached just shy of $85 a barrel yesterday as trade through the Strait of Hormuz – through which 20% of global flow moves daily – halted entirely. Gas prices also rose sharply. Iraq announced plans to pause production due to the disruption. Equity and bond markets priced in the impact of a potential supply shock, anticipated to hike energy costs, stoke inflation and force higher interest rate policy. Gold fell 4% as higher Treasury yields offered haven seekers an alternative home.
Europe felt the brunt of investor concern, with Germany’s DAX down 3.44%, France’s CAC 40 falling 3.46% and the FTSE 100 fell 2.75%. The US began trading with similar negativity but markets were granted reprieve in the form of President Donald Trump who pledged insurance guarantees and escorts for tankers using Hormuz. The S&P 500 therefore closed down a more muted 0.94% and NASDAQ index fell just 1.02%. The brent crude oil price fell back to $80 on the news.
Today’s trading in Asia has not picked up the optimistic baton – with markets down across the region. Japan’s Nikkei is down 3.73% at the time of writing, while China’s Shanghai Composite is down 1.29% and Hong Kong’s Hang Seng has fallen 2.78%. South Korea’s KOSPI index is in technical correction territory, down 12%.
Losses are driven by AI-names in a reversal of market trends that have dominated in recent years, and US dollar strength has also weighed.
But futures for Europe suggest a more robust open – the FTSE 100 is currently on track to open flat, and futures for France, Italy and Germany are edging into positive territory. The old-economy nature of the region, a headwind in recent years, is proving a boon. This underlines the importance of portfolio diversification in times of market stress.
What next?
The Strait of Hormuz is the focus of markets. Some Gulf states do have other trade routes available, using Red Sea pipelines, and the US – one of the world’s biggest oil producers – is far removed from the conflict, at least geographically.
A number of oil exporters including Saudi Arabia, and indeed importers such as China, also have reserves outside of the conflict zone which can provide some buffer, but are finite. Renewable energy sources will also help at the margin. But Hormuz resuming usual trade is essential for asset price normalisation.
Some investors are questioning whether this triggers a financial crisis; a toxic combination of asset prices collapsing coupled with recession. Fear is understandable – the events are alarming and upsetting, and from a markets point of view, the VIX volatility index hit 28 yesterday, above the 24 level which piques our interest. But it is important to stress that a prolonged bear market is not our base case scenario. The US military is a global strength, and the President has made it clear restoring global energy supply is a priority.
The downward pressure on stocks is likely to continue until this crucial trade route is made safe. Once secured however, we expect markets to return to optimism – with the volatility we have come to anticipate as the norm under a Trump presidency. The most sensible investment strategy is therefore to sit tight. Well diversified portfolios, with exposure to different asset classes, geographies and styles will be most robust against uncertainty.
What Spring Statement?
With oil prices dominating global market moves, it was easy to miss Chancellor Rachel Reeves’ Spring Statement yesterday.
Against a troubled backdrop, the Chancellor was keen to celebrate her successes; the independent Office of Budget Responsibility’s progress report that credited the Labour Party as delivering lower borrowing, higher growth economic growth for 2027 and 2028, and lower inflation for the UK. Reeves glossed over the growth downgrade for 2026 – lowered to 1.1% from 1.4%.
On that reasonably positive data set, you’d have expected gilt yields to dip, but markets were listening less to what is happening in the House of Commons and more on the war in the Middle East. Expectations that higher oil prices will flow through to re-inflation have sent yields higher, with the 10-year gilt yield reaching 4.53% in intraday trading. The market slashed expectations for an interest rate cut later this month, and some forecasters adjusted their outlook to just one cut of 25bp through 2026. We think is overly pessimistic but understand investors’ caution.”
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