Stagflation fears swirl, four weeks on from Iran war outbreak
Trump extends Iran ultimatum, but oil prices stay scorchingly high.
• FTSE 100 set to remain downbeat in early trade
• The blue-chip index has fallen by more than 8% since the outbreak of the war.
• Housebuilders, airlines, miners and banks are among the worst hit.
• China showed resilience with industrial profits rising sharply before Iran crisis.
• US tech giants facing triple whammy of higher for longer interest rates, AI bubble worries and seismic social media ruling.
Susannah Streeter, chief investment strategist, Wealth Club.
‘’Investors are set to stay in a wary mood at the end of a week infused with nervousness about the trajectory of the war in Iran. President Trump has extended the deadline of his ultimatum to Iran, which initially offered respite from the sell-off, but a pessimistic mood has settled back in. The FTSE 100 is set for a struggle in early trade, as oil prices march higher again back to scorching levels. Brent Crude is trading close to $110 a barrel as scepticism sets in about any deal being reached, with the benchmark up more than 65% since mid-February.
The conflict has led to a sharp reversal in the Footsie’s fortunes. Just four weeks ago the index had been racing higher on a streak of optimism, trading at a record all-time high, within touching distance of 11,000. But after the strikes began on Feb 28, confidence has been ebbing away. The record run has turned into a miserable month, with the index down around 8% in just four weeks.
Investors have been bracing for the economic impact of the war, with housebuilders, airlines, banks and miners particularly badly hit. With interest rates now expected to ramp up, making mortgages increasingly unaffordable, hopes for a sales lift in the housing market have been dashed. Barratt Redrow has fallen by 25%, Persimmon by 26% and Taylor Wimpey by 22% as rising borrowing costs bite. Airlines have had a particularly turbulent month, hit by disruption to Middle East routes, a fall in confidence and fears of escalating future fuel costs. EasyJet is down by around 22% and British Airways owner IAG has fallen 14%.
Banking stocks have been sideswiped by the conflict, even though usually rising rates benefit net income margins. But it also means there’s now an increased chance of loans going bad, as economic conditions deteriorate and the chaos in the mortgage market, as deals have been pulled and loans repriced, hits fees and adds uncertainty. NatWest has fallen 13% since the outbreak of the war, as it’s not just seen as a bellwether for the UK economy but also because it’s been more exposed due to the way it’s hedged against changes in interest rates. Plus HSBC (-14%) and Standard Chartered (-15%) also have specific exposure to the Middle East region, putting more pressure on share prices.
The surprise fall in precious metals prices has dragged down the mining sector. During previous eras of high geopolitical tensions, gold and silver have been sought out as safe havens. But the volatile moves we have seen in markets have upended norms, pushing down mining stocks. Antofagasta, the copper and gold mining company, has seen shares dive 24% since the outbreak of conflict. The sharp sell-off in equities has led to a scramble to cover positions. Also, there’s been a sell-off in government bonds, in particular Treasuries, sparking a rise in yields. This makes gold less attractive than such assets given that gold pays no interest, while the strengthening of the dollar also makes gold more expensive for buyers in other currencies.
Right now, there seems little prospect of a sharp recovery given that the conflict in the Middle East appears entrenched, with no easy resolution in sight. The US President has given Iran another ten days to agree to terms for a ceasefire, but the prospect of a sharp escalation is hovering given the US threat to attack Iran’s power plants, and Tehran’s vow to retaliate. While Iran appears to be allowing a limited number of ‘friendly’ flag tankers to pass through the Strait of Hormuz, supplies remain highly constrained from the Middle East. The US is sending thousands more ground troops to the region, which is being interpreted as a move to put more pressure on Tehran. But it’s also a signal that, given Iran’s defiance, a more complex and lengthy military operation will be required to force a capitulation.
Hopes of a swift resolution have faded, energy costs are set to stay painfully high, and the spectre of stagflation is hovering over economies. The prospect of stagnation and persistently high prices is a toxic combination and one which central banks will find difficult to solve given the limited tools available. Some economies will be more resilient than others, with China showing it was on a firmer footing than expected before war erupted. Industrial profits rose by just over 15% in the first two months of the year, up from a measly 0.6% growth in 2025. But the momentum looks set to have been rudely interrupted by the crude shock. While China had built up stockpiles of oil and gas reserves as well as investing heavily in renewables, it won’t be completely insulated given its trading partners will be hit hard.
The US tech sector is being hit by a triple whammy. Concerns that high interest rates will linger for longer puts pressure on the value of future earnings. AI bubble fears are still brewing and now the seismic social media ruling this week has raised big questions about future profitability for some of the big players. While multiple appeals are expected, Meta and YouTube owner Alphabet are facing a long line of new plaintiffs also accusing the giants of negligence in designing and operating their platforms. They face the prospect of having to come to a master settlement for a tidal wave of cases. Ultimately, the precedent set by the ruling may force the companies into a fundamental redesign of the infinite scroll features, which could affect engagement and ad revenue. ‘’
