We are now 10 days into the Israel / US vs Iran conflict. Late Sunday there was news that a new Supreme Leader had been selected, Mojtaba Khamenei, the son of former Supreme Leader Ali Khamenei. Prior to selection both Israel and the US made threats, hinting the conflict would continue if they did not agree with who is chosen. The US president told ABC news that the next leader “is not going to last long” if he does not approve of who has been selected.
Ammunition and launchers are depleting on both sides. Trump likely wants this resolved quickly as mid-terms are later this year, especially with gas prices up 14% in a week. However, this morning we have woken up to news of oil breaching the $100/ barrel mark, the first time since 2022. There are several possibilities and things are evolving very quickly so it can all change in a heartbeat.
A quick de-escalation will only come from some form of agreement between the US, Israel and Iran, or from the Strait of Hormuz re-opening. (The Strait is not officially closed but many ships are not moving through due to the close nature of the missile attacks, and insurance companies for the ships are hiking rates and pulling contracts). If we see a de-escalation there might be a small stock and bond rally as inflation risks are calmed. This seems unlikely as US President has demanded an “unconditional surrender” which Iran will not agree to.
A prolonged conflict will likely result in the Strait remaining “closed” leading to higher oil prices and a greater impact on inflation. The agriculture commodity index is already up highlighting concerns around supply.
There is also potential for a fertiliser shock. The strait region produces significant amounts of ammonia and urea, which are essential for agricultural fertilisers. Around a third of globally traded urea passes through the Strait. Small delays of even weeks can impact pricing and potentially food inflation. If inflation picks up on the back of this then rate cuts become less likely so stocks and bonds could fall further. Commodities will likely do well. This includes safe haven assets such as gold as well as soft commodities.
Finally, any escalation will hike the oil price, which we saw on Sunday night and on Monday. Selecting a new Supreme Leader was not favourable to markets, especially one which does not mark a regime change.
Bond markets have already corrected some of the priced in interest rate cuts. As at the end of last week the US market is pricing in around 50bps in rate cuts vs 70bps just a week prior. The UK is around 30bps vs 50bps. The ECB is not pricing in any cuts compared to 15bps of cuts the week before. This is how quickly things are changing: those numbers were as at the end of last week and now today investors are predicting the BoE will not cut rates at all in 2026.
Markets have been volatile since the beginning of the conflict, as you would expect. I believe most of our managers are using the volatility as attractive entries and exits. Almost everything is down apart from the dollar. Some managers have reported buying the dip but we have also seen a small flight to safety in the dollar. US high yield bonds, US investment grade bonds, and the US equity market were all roughly flat.
Surprisingly gold was down which is usually seen as a safe haven asset. Some of that would have been profit taking and a move to cash reserve positions. At the time of writing the gold price is $5,096/oz which is 2% down since the conflict began. Gold is still up over 19% YTD and silver is still up over 14% YTD.
Asia and Emerging Markets (EM) took some bigger hits last week. The EM index was down 7.5% last week (since 27th February) but is now only down 5.5%. Taiwan was down about the same at 7.3% last week, but now around 5%. Taiwan is still up 16% YTD though. The largest market move was seen in Korea, which was down over 20% in the middle of last week, but came back slightly on Thursday and is currently down 12% (since the beginning of the conflict). Similar to Taiwan, Korea has delivered significant returns YTD though, around 30%. And in 2025 Korea was up over 70%.
There was a G7 Emergency meeting yesterday to discuss oil prices, however oil has moderated on the expectations for an IEA-managed release of reserves. The meeting decided more analysis was needed before they release reserves, there is another meeting on Thursday. As I said earlier the situation is moving very quickly, markets are reacting to lots of information so it will be volatile but that can create greater investing opportunities.
Emily Cave – Research Analyst
FPC26664
All charts and data sourced from FactSet
Hawksmoor Investment Management Limited is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk) with its registered office at 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. This document does not constitute an offer or invitation to any person in respect of the securities or funds described, nor should its content be interpreted as investment or tax advice for which you should consult your independent financial adviser and or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. The editorial content is the personal opinion of Emily Cave, Research Analyst. Other opinions expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represent the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. Currency exchange rates may affect the value of investments.
