Middle East conflict – rapid reaction

2nd March

Middle East conflict – rapid reaction

Shackleton’s Head of Investments, Charlie Lloyd shares an update and his thoughts on the investment implications of the unfolding situation in the Middle East.

The US and Israel launched military action against Iran over the weekend, with the US president subsequently urging the Iranian population to rise up against the regime following the initial bombing campaign. The situation escalated rapidly, culminating in the assassination of Iran’s Supreme Leader and what appears to be a retaliatory “scorched earth” strategy from Tehran, including strikes against Gulf states such as the UAE, as well as a Saudi oil refinery.

Oil prices had already been trending higher in recent weeks amid the visible build-up of US military assets in the region. They surged again this morning following the effective closure of the Strait of Hormuz – a vital artery for global crude oil flows. However, this route is also the primary conduit for Iranian oil exports to China, one of Tehran’s most important economic partners and a major buyer of its crude. A sustained disruption to traffic through Hormuz would therefore threaten Iran’s own revenue stream, a factor that may ultimately act as a constraint on further escalation.

So far, financial markets have reacted broadly as expected, with a clear – though not extreme – shift to “risk-off” positioning. Equity markets are down around 1–2%, following a strong start to the year, while the gold price has risen by roughly 2%.

Government bond prices have edged lower, likely reflecting concerns that higher oil prices could rekindle inflationary pressures, which would be negative for the bond market. That said, bonds had also enjoyed a solid start to 2026, and markets are not yet pricing in a prolonged inflation shock. A conflict lasting around four weeks, as suggested by President Trump, would probably have only a limited and temporary impact on inflation. With US mid-term elections scheduled for November, and American consumers highly sensitive to gasoline prices – which have already risen sharply – there may be political incentives to contain the duration and economic fallout of the conflict.

As is typical during periods of heightened geopolitical tension, the US dollar has strengthened against most major currencies, including sterling. For sterling-based investors, this currency move has helped offset some of the weakness in overseas equity markets, underscoring the importance of diversification not only across asset classes but also across currencies.

The situation remains highly fluid and fast-moving. As ever, reacting impulsively to headlines can prove counterproductive. Shackleton’s investment team will continue to manage portfolios actively – controlling risk exposures, while remaining alert to opportunities that may arise amid the market volatility.

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