What does the chart show?
There is a lot to be worried about currently. Two things that give me comfort are, firstly, the clear incentive for both sides to deescalate – the US has significantly degraded Iran’s military capabilities but there appears to be little appetite for an extended war among American voters; while Iran has shown it can hurt opponents whatever their size, but does it need to continue doing it, with some form of sanctions relief now a realistic prospect? And secondly, the starting point for financial markets. The chart above sums two variables that together provide a simple approximation of risk in the financial system: the blue line looks at where borrowing costs are relative to their long term average – a high number is something to watch out for: it tells us borrowing costs have been higher in the past and could head back there in the near term. The green line looks at the sensitivity of government bond prices to borrowing costs – again, a high number is a warning sign: a reading of 8%, for example, tells us that a 1% increase in borrowing costs would prompt an 8% fall in the value of any government bonds in one’s portfolio. Finally then, the orange shaded area is the sum of those two variables, with a high reading indicating more risk in the system.
Why this is important
Where are we today in terms of this simple risk measure? Thankfully we’re low (30th percentile): interest rates are already quite high in the context of the past 25 years and – the two things are related – the impact of a 1% rise in borrowing costs is also lower than it has been for some time. Compared to 2022, when financial assets fell in unison in response to higher interest rates, risk in the system is significantly reduced today. Some comfort then, but now is still the time to have protection built into portfolios, as we do in the form of cash, defensive equities and certain explicit protection strategies.
Energy-driven geopolitical risk dominated global markets, with the Iran conflict pushing oil above $100, reigniting inflation concerns, and forcing a sharp repricing of growth and interest rate expectations worldwide.
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Iran conflict escalates further: Donald Trump intensified rhetoric around potential strikes on Iranian energy infrastructure, while signalling a short timeline for action, keeping markets on edge and oil prices elevated.
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Oil-driven inflation fears reshape policy expectations: The surge in crude prices above $100 pushed investors to reassess the outlook for the Federal Reserve, with rate cuts increasingly delayed amid renewed inflation risks.
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Equity markets turn volatile: US equities sold off mid-week before stabilising, as energy shocks and geopolitical uncertainty outweighed corporate and macroeconomic data.
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US presses allies on Hormuz security: Washington increased diplomatic pressure on Europe and Asia to support efforts to secure shipping lanes, widening the geopolitical dimension of the crisis.
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Energy shock hits UK economy: Rising oil and gas prices driven by the Iran conflict pushed inflation expectations higher, worsening the cost-of-living crisis and squeezing household finances.
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BOE: The Bank of England voted unanimously to keep interest rates on hold at 3.75% and said it "stands ready to act" to tackle any inflation surge triggered by war in the Middle East.
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Growth outlook downgraded: Forecasts for 2026 GDP growth were revised down sharply (to around ~0.7%), reflecting weaker consumption and higher borrowing costs.
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Government steps up crisis response: COBRA emergency meetings focused on energy security, supply disruption risks, and potential fiscal support measures. UK EU alignment debate increases.
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Energy-driven inflation pressures intensify: European economies saw a renewed rise in inflation expectations as higher oil and gas prices filtered into industrial and consumer costs.
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Policy coordination intensifies: EU leaders discussed joint measures on energy security, including coordinated reserve use and contingency planning for supply disruptions.
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Growth risks mount across core economies: Germany and France reported weakening industrial momentum, with energy-intensive sectors particularly exposed to rising input costs.
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Strategic autonomy debate re-emerges: The crisis revived discussions on reducing dependence on external energy sources and strengthening intra-EU resilience.
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Beijing pushes diplomatic stance on Iran: China opposed escalation and called for de-escalation, resisting US pressure to support military involvement.
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US-China economic engagement continues: Preparatory talks for a Trump–Xi summit focused on trade frictions, export controls, and supply chains.
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Energy import risks increase: Japan faced a dual shock from external energy risks and weak domestic demand, increasing policy challenges.
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Global energy crisis fears: The Strait of Hormuz tensions triggered warnings of a supply shock potentially exceeding past oil crisis. Countries begin emergency responses (fuel-saving policies, reserve releases, alternative supply strategies).
