He reports that the consensus among market strategists is that the conflict is “likely to remain contained in duration and scale, though the risk of miscalculation is high”.
Ahead of tomorrow’s spring statement from UK Chancellor Rachel Reeves, Rathbones’ Isabella Galliers-Pratt says the conflict “reiterates the need to increase defence spending both in the UK and around the world and may prompt the Government to accelerate their stated commitment to raise defence expenditure over the coming years”.
In the near term, if upward pressure on oil prices is sustained, it would feed through into higher inflation, both domestically and internationally.
“At the margin, that combination of inflationary and spending pressures could push UK bond yields higher, eroding any emerging fiscal headroom that the Chancellor may have believed was available ahead of the Spring Statement.”
As we tick past midday, the stock market situation is little changed from the first hour of trading on Monday.
The market is not really reacting to new developments, including the downing of three US fighter jets over Kuwait (apparently friendly fire), and a joint statement from the US and six allied Gulf states condemning Iran’s retaliatory attacks on the region.
The FTSE 100 is down 1.1%, while the DAX is down 2% in Frankfurt, while the Paris, Milan and Madrid benchmarks are respectively down 1.7%, 1.8% and 2.3%.
London’s blue-chip index is doing better than its peers as a mix of defence, oil, precious metals miners and utilities are partly offsetting the losses elsewhere, with 17 shares in positive territory, including six of the 12 largest companies.
US tech stocks are expected to lead the retreat when Wall Street begins trading later, with Nasdaq futures dfown 1.4%, while those for the Dow Jones and S&P 500 are pointing to declines of 1.1-1.2%.
The statement from the US, Bahrain, Jordan, Kuwait, Saudi Arabia, Qatar and the United Arab Emirates condemned Iran’s “indiscriminate and reckless attacks” across the region.
Attacks are said to have taken place in Bahrain, Iraq, Jordan, Kuwait, Oman, Qatar, Saudi and locations in the UAE, including Dubai and Abu Dhabi.
“We stand united in defense of our citizens, our sovereignty, and our territories, and we reaffirm our right to self-defense in the face of these attacks, while underscoring our commitment to regional security and commending the effective cooperation in air and missile defense that prevented greater loss of life and destruction.”
Saudi Arabia’s energy ministry earlier confirmed that operations at its Ras Tanura refinery had been affected due to “minor damage from falling debris” after two drones were intercepted in the refinery’s vicinity.
“Some operational units at the refinery were shut down as a precautionary measure, without any impact on the supply of petroleum products to local markets,” the ministry said.
BAE Systems shares are up 5% to new all-time highs (up 26% so far this year and 271% since the start of the war in Ukraine in early 2022), with others in the sector gaining too. Defence contractor Babcock is up 1%, helmet and gasmask maker Avon Technologies is up 3.9%, defence tech specialist QinetiQ 2.5% and countermeasures manufacturer Chemring 1.04%.
Aerospace groups Rolls-Royce, Melrose and Senior are down 1.6%, 2.8% and 4% respectively.
Strategists at Morgan Stanley reckon European defence stocks could benefit from a renewed spending push following the latest escalation in the Middle East.
They note that heightened geopolitical risk has historically been a key driver of defence budgets, and argue that instability may increase pressure on Europe to accelerate its own rearmament, particularly in air and missile defence.
Morgan Stanley also sees potential upside to defence budgets in the Gulf and the US. Companies with Middle East exposure include BAE Systems, Leonardo and Dassault Aviation, while BAE, Leonardo and Kongsberg have significant US sales.
The outlook for aerospace is less clear. Prolonged disruption could hit supply chains, raise energy costs and dampen air traffic demand in the region. Around 6% of the world’s western-built passenger fleet is operated by Middle East airlines, according to Cirium, leaving engine makers such as Rolls-Royce exposed if disruption persists.
Many Informa investors have seemingly jettisoned the stock due to worries about the company’s significant exposure to the Middle East following the war in Iran.
Around a third of Informa’s live events business is linked to the region, equivalent to approximately a quarter of the group’s total revenues, making it one of the more exposed stocks in the index to an escalation in the conflict.
However, analysts at Panmure Liberum, who retain a ‘buy’ rating on the stock with a target price of 1,200p, sought to reassure investors that the immediate financial impact was likely to be limited.
The broker noted that Informa has already staged its major first-half events, while its largest second-half events are scheduled late in the year, giving the situation time to stabilise before material disruption becomes likely.
London’s blue-chip index is outperforming peers in continental Europe.
The FTSE’s down 0.8%, compared to a 1.8% decline for the German DAX and 1.6% for the CAC in Paris.
In Madrid and Milan, the IBEX 35 and FTSE MIB are down 2.6% and 2% respectively.
The Euro Stoxx 600 has fallen 1.5%, with hotels group Accor, trou operator TUI, cruise specialist Carnival and events organiser Informa the biggest fallers, all down over 8%.
The FTSE 100 is down 81 points at 10,829 now.
Informa is the biggest faller, down 8.7%, followed by chemicals group Croda, down 5.4%, and Smith & Nephew, down 4.8% on the back of its results.
IAG’s losses have been trimmed to 5%, even though flight cancellations to many points of the Middle East are likely to remain in place for several days at least.
Banks Barclays and Stan Chart are next, followed by IHG, JD Sports, HSBC and Burberry.
“Nothing quite changes the running order than a war,” says market analyst Neil Wilson at Saxo, with economic data and worries about AI taking a back seat to the conflict in the Middle East.
“Though I would note that this conflict comes at a time of fragility within financial markets that could see deeper trouble.”
The counter to this is that some sort of conflict had been widely expected.
For markets, says Wilson, the path depends on how long the fighting lasts and how oil supplies are disrupted.
“President Trump said it could last 4 weeks, but we don’t know what the spillovers may be. The coordinated attacks with Israel are aimed at regime change, which implies an outcome-based endpoint not a time-based one.”
“Let’s imagine this dies down in a week as scenario A, and scenario B as protracted war that draws in regional players.”
“If we get scenario B, with the potential for strikes against oil facilities as part of this, whether in Iran or elsewhere, we are looking at $100 oil and that really would hit the growth outlook.”
Saudi Aramco has said one of its facilities, Ras Tanura, the largest refinery in the world, was hit. This facility processes 550,000 barrels per day.
Although US President Donald Trump said attacks against Iran will continue “until all of our objectives are achieved” in a video address last night, many market observers do not expect fighting to continue for long.
The conflict is likely to have a “sharp but short-lived” impact on oil and gas prices, says George Lagarias, chief economist at Forvis Mazars.
Oil prices are now up 30% since last December and year-on-year positive for the first time since December 2024.
“This has less to do with Iran’s productive capacity (only 3% to 5% of global production), some of which OPEC+ suggested it can quickly make up for, and more to do with the effective closing of the Straits of Hormuz,” he points out.
“Our base case is that the region and energy markets have prepared for the present eventuality, and it is a matter of time before contingency plans become operational that would allow oil to flow beyond Iranian chokepoints.
“However, if there are unwelcome surprises, prolonged energy market volatility could have a very quick effect on US inflation, whose consistently lower-than-expected numbers have, thus far, mitigated some of the more acute consequences of the trade wars.
“Similarly, higher energy prices could hurt already sluggish GDP growth in Europe and the UK.”
Some details on commodity price moves.
Brent crude oil is up almost 10% to just under $80 a barrel, with US WTI rising 9% to just over $73 a barrel.
UK natural gas prices are up 25% to 98.5p per therm, not far from spikes in January, which were the highest in 10 months.
Gold is up 2.4% to above $5,400 an ounce, not far from its record high in January. Silver is up 1.7% to $95.4/oz.
Copper prices are down 0.7%, with coal and steel down too, with iron ore flat.
The FTSE 100 has dropped 82 points to 10,828 in initial trades at the start of the week, with airlines, hotels, banks and retailers driving the downside.
British Airways owner IAG is the biggest faller, down 9.78%.
It is followed by events organiser and business data supplier Informa, down 6.7%, and hotelier IHG, down 5.3%.
Barclays, easyJet, Standard Chartered, HSBC and Burberry are next, all down over 4%.
Risers are led by defence companies, with BAE Systems rising 6.9%, followed by precious metals miner Endeavour, up 5.6%, and oil and gas producers Shell and BP, both up over 5%.
The Competition and Markets Authority has launched an investigation into Intercontinental Hotels, Hilton and Marriott over suspected sharing of sensitive commercial information through a data provider.
The watchdog said it is examining whether the hotel groups used the STR analytics platform, owned by OnTheMarket parent CoStar, to exchange “competitively sensitive information”. CoStar is also under investigation.
At this stage, the regulator stressed that “no assumptions should be made about whether the law has been broken”.
The probe falls under the Competition Act 1998. After gathering evidence, the CMA may issue a statement of objections if it provisionally concludes competition law has been breached.
Smith & Nephew reported a strong finish to 2025, with profits and cash flow rising as it completed its three-year turnaround plan and reiterated confidence in its plans for faster growth.
Fourth quarter revenue rose 8.3% to $1.7 billion, or 6.2% on an underlying basis, meaning full-year revenue increased 6.1% to $6.2 billion, with underlying growth of 5.3%.
Operating profit climbed 20.7% to $794 million and trading profit rose 15.5% to $1.2 billion, with trading margins rising to 19.7% from 18.1%.
For the 2026 financial year, the group expects underlying revenue growth of around 6% and organic trading profit growth of around 8%, which will be slightly diluted by a recent acquisition.
House price growth held steady in February, with annual growth unchanged at 1.0% and prices rising 0.3% month on month, according to fresh data from Nationwide.
The average home cost £273,176, up from £270,873 in January.
Robert Gardner, Nationwide’s chief economist, said the figures point to “a modest recovery after a dip at the end of 2025”, which had likely reflected uncertainty ahead of the Budget.
Transactions in 2025 were 10% higher than in 2024. First-time buyer mortgage completions rose 18%, helped by improved affordability and easier access to credit. Home mover activity increased 15%, while buy-to-let purchases remained subdued.
While oil and gas prices have spiked, the initial reaction to the fighting in the Middle East has been relatively muted, says market analyst Chris Beauchamp at IG.
Oil price gains “appear contained for now”, he says, “as we wait to see if shipping through Hormuz can continue at lower levels or will be blocked entirely.
“Oil and gas infrastructure in the region has not yet been extensively targeted, keeping oil well south of the $100 barrel range that many expected as a result of the weekend.”
Stock market losses so far in Asia are not massive as “investors have had one eye on the possibility of war for weeks”, Beauchamp says.
“But with Trump saying the campaign could run for four weeks, there is plenty of scope for more downside should the conflict widen to encompass oil and gas infrastructure, a move that would likely see oil make further progress towards three figures.”
Kathleen Brooks at XTB notes that the gold price is higher by more than 2%, the dollar is the top performing G10 currency and sovereign bonds are expected to attract fresh inflows later this morning.
“For such an unprecedented global event, the moves so far in financial markets have been moderate,” she says, but cautioning that “this is a highly fluid situation and headline risk looms large for asset prices this week”.
The FTSE could take losses but remain an outperformer, Brooks says.
“Airline stocks, hotels and holiday companies are all expected to see large declines in their share prices, as travel to the region remains closed.”
“In contrast, defense stocks are likely to surge. Although futures suggest that the FTSE 100 will open lower today, the UK index is set to be an outperformer, as the proliferation of defense names and oil majors help to prop up the index.”
The FTSE 100 is likely to drop sharply at the start of the week as markets react to the US and Israel’s war on Iran and counterstrikes that have been fired into several Gulf states.
London’s blue-chip share index is expected to start around 85 points lower, after a week when it gained over 230 points or 2.2% to finish at 10,917.4.
Oil producers Shell and BP are likely to receive a boost from a surge in oil prices, with Brent crude up 9% to $79.36 a barrel – the highest since the start of last year.
Asia-Pacific markets have plunged overnight, with the Hong Kong and Singapore indices falling over 2%, while India’s Sensex and Japan’s Nikkei have dropped 1.8% and 1.35% respectively.
US futures are in the red, too, with the Nasdaq called 1.8% lower, while futures for both S&P 500 and Dow Jones are down around 1.5%.
The US and Israel launched air strikes on Iran in the early hours of Saturday, including the reported assassination of the country’s supreme leader and other senior officials, which was followed by retaliation from Iran with missiles and drones attacking sites across the region, including Qatar, United Arab Emirates, Saudi Arabia, Bahrain and Kuwait. The fighting came two days after US-Iran nuclear negotiations ended without a breakthrough, even though Iran was said to have agreed to degrade its current stockpiles of nuclear material.
