What has happened so far?
Over the weekend, the United States and Israel have carried out airstrikes against targets inside Iran. Iran has responded with attacks across the Gulf region, raising the risk that this may become a wider conflict rather than a short, contained event.
Iranian state media have confirmed that Iran's Supreme Leader, Ayatollah Ali Khamenei, has been killed in the strikes. Khamenei was Iran's highest authority, presiding over a theocratic system in which the Supreme Leader sits above elected institutions and serves for life. His death represents one of the most significant political shocks Iran has experienced in decades and materially increases the uncertainty around how events develop from here.
The UK government has stated that it played no role in the strikes, while condemning Iranian attacks across the region and calling for restraint. However, Sir Keir Starmer has since confirmed that the UK has agreed to a US request to use British military bases for ongoing strikes on Iran.
At the time of writing, the overall picture is still developing. Markets will be watching for clearer information on the full list of targets hit, the extent of damage to strategic facilities, the scale of casualties, and whether both sides intend for this to be a short exchange or if it is the beginning of a longer campaign. The strong suggestion is that US and Israel want nothing less than regime change in Iran, and for the country to be far weaker militarily.
How this compares to previous Middle East conflicts
It is useful to compare the opening phase of this conflict with earlier US-involved operations in the region, including the start of the 2003 Iraq War.
There are some similarities. The initial action appears designed to move quickly, hitting multiple targets in a short period with the aim of degrading military capability early. The "act now to prevent a greater threat" framing is also familiar from past conflicts.
The differences, however, are significant. The killing of Iran's Supreme Leader on the first day is a major escalation in political terms. In Iraq in 2003, regime change was pursued through a large-scale invasion and the gradual takeover of territory and institutions. Here, the immediate removal of Iran's apex political leader raises the prospect of unpredictable succession dynamics and increases the risk that Iran frames this as an existential fight. Both of which make the endgame harder to define and more difficult to negotiate.
Iran also has a greater capacity to retaliate through multiple channels across the region than Iraq did, increasing the risk of broader spillover. And unlike 2003, energy and shipping infrastructure are an immediate transmission channel into the global economy that Iran may disrupt. The Strait of Hormuz, a key shipping bottleneck in the Persian Gulf, transports about 20% of the world’s oil exports and there are already reports of ships being attacked.
How markets may be impacted
In the early stages of a geopolitical shock, markets tend to move on uncertainty before the facts are fully established. There are three potential transmission channels that have seen immediate responses.
Energy is the most direct channel. When conflict risk rises in and around the Gulf region, oil markets typically price in the possibility of supply or shipping disruption quickly, even before anything is physically disrupted. Brent crude spiked over 10% to $80 a barrel when markets opened. For UK investors, sustained higher oil prices can add to inflation through fuel, transport and household energy costs, which in turn affects interest rate expectations, bond prices and equity valuations. Some energy-linked equities may benefit, while consumer-sensitive areas of the market can come under pressure.
Broader risk appetite is the second channel. Geopolitical shocks often prompt investors to adopt a more cautious posture in the short term, with equity markets under pressure while perceived safe-haven assets attract demand. European stocks and US futures are down around 2% in initial trading. The direction and scale of moves will depend on whether markets are more concerned about weaker growth or higher inflation. For diversified multi-asset portfolios, this can show up as volatility across global equity holdings, and shifting bond performance, as rate expectations adjust.
Currencies are the third channel. Periods of global stress tend to strengthen the US dollar which is evident in the initial market response. For UK investors holding unhedged global assets, this can offset some overseas equity declines, but it also adds to imported inflation by making dollar-priced commodities more expensive.
What this means for portfolios
The most important question for markets is not the headline itself, but how long the situation lasts and whether it spreads. A short, intense exchange with a clear diplomatic off-ramp would likely see the risk premium in markets fade relatively quickly. A prolonged conflict with repeated retaliation, and a sustained energy shock, would have broader implications for inflation, interest rates and growth.
The confirmed death of Khamenei increases the uncertainty. Leadership transition under these circumstances can make decision-making inside Iran more volatile and raise the chance of a miscalculation on all sides.
Although broad equity markets have fallen this morning, the FTSE 100 is faring better given its commodity and defence sector exposures. Hence this is precisely an environment in which diversified, long-term portfolios are advantageous. We would caution against making reactive changes in response to fast-moving headlines. We will continue to monitor developments closely and provide updates as the situation becomes clearer.