Iran – a Slippery Slope

JD Vance fails to reach a negotiated agreement to end the war with Iran

A diplomatic team led by US Vice-President JD Vance tried, and failed, to reach a negotiated agreement to end the war with Iran over the weekend.

Markets were not hopeful of a swift resolution to the conflict, given the level of distrust between both sides. Israel has continued its attacks on Hezbollah in Lebanon, with the US and Israel claiming it was outside the scope of the two-week ceasefire. Iran has called for a halt to attacks on all its allies.

Meanwhile, Trump is under growing pressure at home ahead of the mid-term elections, with the latest polls suggesting 59% of Americans feel the war is going somewhat or very badly for the US. Many believe that key American objectives such as the opening of the Strait of Hormuz, securing regime change and thus greater freedom for the people of Iran, as well as ending Iran’s nuclear programme remain unmet.

President Trump has said the US will now impose a naval blockade of Iran and ensure no one who pays an illegal toll will have safe passage on the high seas. The US will continue clearing mines from the Strait of Hormuz, while Trump added that the US military was ‘locked and loaded and prepared to resume attacks against Iran at an appropriate moment.’ Meanwhile, the Iranian regime, no matter how bruised, bloodied and battered, just to have survived is effectively a victory for the tyrants of Tehran. At the current time, the regime lives to fight another day and remains a threat to the Strait of Hormuz and neighbouring Gulf states. This still has the makings of a geopolitical disaster, but for now markets cling to the hope that if the current ceasefire holds, then diplomacy is not dead in the water.

The truth is nobody knows what Trump will do next, not even Trump possibly!

Meanwhile, Trump’s frustration has been targeted towards NATO allies, including the UK. Trump continues to threaten to withdraw from NATO. This is disturbing given the threat from Putin, who continues to bombard Ukraine. The Russian ‘Cold War’ threat was once again highlighted last week as the UK confirmed it had tracked Russian submarine activity above UK undersea fibre-optic and gas pipeline infrastructure. Media reports also suggest that Russian cyberattacks on the UK have risen by over 1500% since the UK backed Ukraine. The UK is facing inflationary challenges as a result of Trump’s Gulf war, but must also ramp up defence spending when government finances are looking particularly stretched.

At least there was some good news over the weekend in Europe after Victor Orbán – a Putin ally – was defeated in a landslide result in Hungary’s election. Orbán has been a thorn in the side of the EU and Ukraine, but strangely also a European ally of the Trump administration. Indeed, JD Vance was in Budapest last week voicing his support!

 

What have we been watching?

 

A good week for global equities, but particularly the S&P 500 and ‘Mag7’ as Trump’s two-week ceasefire and peace talks between the US and Iran raised hopes of a deal. European equities also performed well. Japanese equities had their best weekly performance since 2024 while emerging markets also rebounded strongly, posting their best week since 2020. Brent oil retreated 14% on news of the ceasefire. This, in turn, eased inflation fears a little and US Treasury yields fell slightly on hopes that the Federal Reserve (Fed) might be able to cut interest rates later this year. In Europe, fears of an April interest rate hike from the European Central Bank (ECB) also eased.

Read our latest investment insights from Alpha PM

 

However, a week is a long time in finance markets these days and the collapse of peace talks over the weekend has seen risk assets open lower this morning, while Brent oil has jumped by 7% to above $101. Fears of an energy shock continue to overshadow the global economy and risk assets.

 

All this comes as the global economic impact of the conflict is increasingly clear. For example, the US CPI print for March last week showed headline inflation increased by 0.87%, the biggest monthly inflationary gain since June 2022. This was driven by a 21% increase in the cost of gasoline, which was the biggest monthly jump since records began in 1967! This pushed the annualised rate of US inflation up to 3.3%. This is likely to make it more difficult for the Fed to cut interest rates. Meanwhile, US media reports suggest that Treasury Secretary Steve Bessent has spoken with Trump about the market reaction to the war in the Gulf and has discussed measures the Treasury could implement if the war were to last 2-3 months.

Meanwhile, investors are left to consider just how will Trump’s blockade work? Will mine-clearing activities place US vessels at greater risk? How will the US determine who has paid Iran a toll? How will those countries that buy Iranian oil, such as China respond? Most critically, will the move intended to choke off Iran’s primary income stream drive global oil prices even higher? The list of uncertainties goes on. Last week’s bounce in global equities gives an idea of the relief bounce possible if the Gulf War is able to be resolved, but given the distrust between the US, Israel and Iran, expect market and energy price volatility to continue!

 

For the UK, like Europe, being more dependent on global energy prices, particularly gas, the failure of peace talks and uncertainty over the opening of the Strait of Hormuz provide a more challenging inflation outlook. The Bank of England is currently expecting UK inflation to have risen to 3.5% in March. However, higher fuel and energy costs are expected to lead to higher food prices, with some industry sources suggesting that grocery inflation could hit 10% later this year. Clearly, this would be unhelpful for the Bank of England and add to the government’s challenge from the ongoing cost-of-living crisis. The uncertainty about inflation and interest rates has also led some analysts to reassess the outlook for the UK property market. For example, Deutsche Bank is forecasting that UK house prices could fall by between 3% and 5%. How will all of this and events in the Gulf play out in the May local elections?

Finally, with the Gulf War dominating headlines, investors should not forget the ongoing AI uncertainty which has overshadowed many traditional business models in recent months. In the latest twist last week, the launch of Anthropic’s Claude Mythos AI tool, which has advanced cyber-security capabilities, has been delayed after fears were raised that it could cause a wave of catastrophic attacks that could take down critical infrastructure if it were to fall into the wrong hands. Let’s hope that is not Iran!

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