Recent developments in the Middle East have created some short-term volatility across global financial markets. While events are still evolving, the economic impact is currently expected to remain relatively contained.
The Gulf Cooperation Council (GCC) countries account for around 2% of global economic activity. However, the region plays an important role in global energy supply, which is where the wider economic impact is most likely to be felt.
Energy markets reacting quickly
The conflict has disrupted shipping through the Strait of Hormuz, one of the most important routes for global energy transportation. Threats to oil and gas supply are being used as a form of economic leverage within the wider conflict, and energy markets have responded quickly.
Since 28 February, UK natural gas prices have risen by around 61%, Brent crude oil by around 28%, and the broader commodities index by approximately 16%. Countries that rely heavily on imported energy — including the UK, Europe and parts of Asia — are therefore more exposed to this type of supply disruption as they compete for available resources.
The US is less sensitive to these developments, given its strong domestic production and status as a net energy exporter following the expansion of shale production in recent years.
Impact on inflation and interest rates
Higher energy prices typically feed through into inflation. Central banks therefore remain cautious following the inflation spike experienced after COVID.
The Bank of England may pause further interest-rate reductions for now, with the base rate currently at 3.75%. Previous forecasts suggested rates could fall to around 3–3.25% by the end of the year, although this now appears less likely given the potential inflationary impact of higher energy costs.
US interest rates are still expected to decline, although potentially at a slower pace, while European economies are particularly sensitive to higher energy costs and have already reduced rates significantly. This does not necessarily imply that interest rates will rise again, but expectations for rate cuts may now be pushed further into the future.
Market reaction so far
Financial markets, excluding commodities as noted above, have responded in a relatively measured manner. Since 28 February, global shares have fallen between 2% and 8%, while UK shares are down around 5%. Government and corporate bond markets have also weakened modestly as interest-rate expectations adjust.
Meanwhile, traditional safe-haven assets, including the US dollar and US Treasury bonds, have strengthened. Given the stronger US dollar, gold prices have not extended their recent gains, although the metal had already risen significantly in recent months.
FPC client portfolios remain well diversified, with a typical medium-risk portfolio (60% growth assets) currently around 3.5% lower since the conflict began, but still approximately 1% positive year to date.
What happens next?
Much will depend on how long the conflict lasts and whether energy supply disruptions continue. Current expectations are that the situation may resolve in days or weeks rather than months, which would help limit the wider economic impact.
Historically, a sustained impact on the global economy tends to occur only if oil prices rise significantly further from current levels and remain elevated for a prolonged period.
There are reports that the US is considering measures to support tanker shipments through the Strait of Hormuz, both militarily and financially, in response to rising insurance costs.
Our perspective
Geopolitical events often lead to short-term market volatility. However, markets have historically shown resilience once uncertainty begins to ease.
Short-term volatility is an expected feature of long-term investing, particularly during periods of geopolitical uncertainty. FPC portfolios are constructed with diversification across asset classes and regions, helping to manage risk during periods such as this.
We will continue to monitor developments closely and keep clients informed if conditions change. If you have any questions about how recent market movements relate to your financial plan, please speak with your adviser.