Economic impact spreads as analysts wait on how US defines ‘victory’
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John Wyn Evans, Head of Market Analysis at Rathbones, one of the UK’s leading wealth and asset management groups, said:
“The challenge facing markets this morning is shaped as much by geopolitics as by economics, and a great deal turns on how the United States ultimately chooses to define ‘victory’ in the Gulf. The shifting and sometimes contradictory list of objectives offered by Washington gives it latitude to declare success at a moment of its choosing – but that flexibility does little to disguise the fact that the regional equilibrium has shifted meaningfully.
“What once looked like a series of contained, face saving exchanges now appears to have become a wider confrontation with more severe and less predictable consequences.
“The response from Iran has been the critical miscalculation. Previous cycles of tension were characterised by heavily signposted missile launches and attacks designed to allow Tehran’s leadership to claim resolve without provoking a broader escalation. This time, the strategy looks markedly different. Strikes have hit not only US or Israeli targets but also civilian sites in other Gulf states, commercial vessels in the Strait of Hormuz and vital infrastructure including oil related facilities and desalination plants.
“Analysts point to the distribution of missiles and drones – and the apparent pre authorised targeting lists – as evidence that this was not a knee jerk response but a long prepared effort to maximise disruption and force concessions.
“Markets are reacting accordingly. When conflicts are counted in days, equilibrium is typically restored quickly. When they stretch into weeks, and when they involve essential commodities, the odds deteriorate. With oil trading above $100 and risk assets under pressure, the situation is beginning to resemble one of those moments. The announcement overnight that the US and IEA could release as much as 400 million barrels from strategic reserves helped pull Brent back from the $120 mark, but even a release of that scale only offsets roughly a month of reduced supply – and offers no help on natural gas.
“For the UK, the implications are immediate. Electricity prices are acutely sensitive to wholesale gas markets, and this structural flaw – laid bare in 2022 – risks forcing the government back into household energy subsidies just months after the Spring Statement’s £30bn of fiscal headroom was announced. Economists estimate a potential £5bn cost across six quarters. Fixed mortgage rates are already being repriced higher in response to gilt moves, adding further pressure on consumers.
“In such circumstances, materially reducing market exposure risks missing any sharp relief rally that could follow progress toward a settlement. But with little sign that Tehran intends to step back – and Washington signalling that its definition of ‘victory’ remains fluid – good news may not be imminent.”