Up next in 10
Oil prices have spiked and markets have slumped as conflict escalates in the Middle East.
And the City is braced for a prolonged period of market volatility, following American and Israeli strikes which killed Iran's Ayatollah over the weekend.
To break down exactly what the conflict means for the markets and the global economy, City AM Editor-in-Chief Christian May is joined by opinion editor Alys Denby and city editor Simon Hunt.
#iran #war #markets #business #trump
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0:00
Oil prices are spiking and markets are
0:02
slumping as war rages in the Middle East
0:04
and the city is braced for a prolonged
0:06
period of market volatility following
0:08
American and Israeli strikes which
0:10
killed Iran's Ayatollah over the
0:12
weekend. Analysts are now particularly
0:14
focused on the potential for a blockade
0:16
of the Strait of Hormuz, critical
0:18
maritime corridor responsible for the
0:20
transit of 20% of global oil supply. The
0:23
government had been banking on sustained
0:25
easing of inflation to change the tide
0:27
on the domestic economic narrative but
0:30
now volatility, uncertainty could derail
0:33
that. To break down exactly what the
0:35
conflict in the Middle East means for
0:37
the markets, for the city and for
0:38
Westminster, I'm joined by City A.M.'s
0:40
comment editor Alice Denby and our city
0:42
editor Simon Hunt. Uh Alice, dramatic
0:45
events over the weekend. Two emergency
0:48
statements from the Prime Minister. Um
0:51
was there a logical sequence to them?
0:54
What did you make of it? No, he seemed
0:55
to initially be saying uh that he
0:57
thought that Trump's action might be
1:00
illegal under international law and so
1:02
he wasn't going to let uh and the
1:04
Americans use British bases in Diego
1:06
Garcia which is of course uh already
1:07
subject of this huge controversy over
1:09
the deal with the Chagos Islands. And
1:10
then overnight on Sunday he seemed to
1:12
change his mind to say that maybe it is
1:14
going to be legal under international
1:15
law so it's fine. Um
1:18
America can use Diego Garcia um but
1:20
that's the extent of our involvement in
1:22
this. So vacillating all over the place
1:24
I think. And again if there's one thing
1:27
that we feel that the Prime Minister
1:28
sort of believes in, it's this Lord
1:30
Hammond international law framework. It
1:33
is very obvious that Trump has no
1:35
interest in that at all. Trump will just
1:36
do whatever he thinks is right for
1:38
American interests. Um
1:40
so yeah, I think he's really not played
1:43
this very well. He's angered the US. He
1:45
He doesn't hasn't been seen to be
1:46
decisive on the international stage or
1:48
indeed to be standing up for the many
1:50
British people affected by this in the
1:52
Middle East. Um so not been a good
1:54
weekend for him. And especially in the
1:55
arena of international affairs where so
1:57
far that's where he's been doing quite
1:58
well. So anywhere he's been most
2:00
comfortable.
2:01
>> Yeah, and his relation his close
2:02
relationship with Donald Trump is
2:03
something we think he's very proud of.
2:05
Um, and he's angered him I think.
2:07
>> Well, Donald Trump has said just in the
2:08
last few minutes that he's very
2:10
disappointed in Starmer, very
2:12
disappointed indeed. Uh, Starmer Prime
2:14
Minister can have his head in
2:15
international law textbooks, uh, but the
2:18
market has got its own concerns.
2:20
Indeed, and perhaps the most pronounced
2:21
move we've seen has been uh, in the oil
2:23
price which is up around uh, 10% to
2:25
around $80 a barrel over the past uh, 24
2:27
hours. That's been led by uh,
2:30
constraints in the supply of oil
2:31
particularly around an area known as the
2:33
Strait of Hormuz which is uh, to the
2:35
south of Iran which is a sort of sea
2:38
passage through which something like 20%
2:40
of of all oil uh, typically uh,
2:43
makes its way through. Uh, so without
2:46
that we're going to see a bit of a um,
2:48
uh, a slow down in supply and that's
2:50
that's pushing the price up. Uh,
2:52
elsewhere um, we've seen uh, on the the
2:55
FTSE this morning uh, defense stocks
2:57
going up. Uh, stocks like BAE Systems
3:00
and over in uh, Italy uh, Leonardo the
3:03
defense company that makes fighter jets
3:05
and helicopters also seen its shares go
3:07
up on the expectation that we'll see
3:09
more European defense spending as a
3:10
result of this.
3:12
Um, and as a as often when you see um,
3:15
uncertainty uh, turbulence in the
3:16
markets like this we're seeing people
3:18
piling into gold. Uh, so the price is up
3:21
about 5% over the weekend. Uh, in a
3:23
similar move to what we saw in in
3:25
previous sort of
3:26
uh, geopolitical events uh, lately such
3:29
as um, Trump's uh, activities in
3:32
Venezuela a few weeks earlier. Is it
3:34
unusual that defense stocks seem to be
3:37
so subject to uh, sentiment and
3:40
expectation rather than fundamentals? I
3:43
appreciate that there is a gradual
3:44
increasing of defense expenditure. It's
3:46
not as clear-cut in this country as some
3:48
people would like it to be, but is it
3:50
rational that every time there is a
3:52
global flash point or uh you know, fresh
3:55
wave of tension somewhere in the world
3:56
that defense stocks just pop on the
3:58
expectation that there's now going to be
4:00
a greater role for them in in the
4:01
national economy? I think perhaps one
4:04
element to this is the level of credence
4:07
that the market gives to European
4:09
countries that pledge to increase
4:11
defense spending. Lots of them over the
4:13
past couple of years have said they want
4:15
to increase spending up to 2, 3, 4% of
4:18
GDP.
4:19
Um but a lot of them uh don't actually
4:21
deliver on these pledges and so only
4:23
when there are big events like this that
4:25
perhaps focus minds on whether they will
4:28
generally commit to this, do we see
4:30
credence in that those defense uh
4:32
pledges going up. You know, if it were a
4:34
period of relative calm geopolitically,
4:38
perhaps there'd be an assumption that a
4:39
lot of European countries would just
4:41
quietly abandon those defense spending
4:43
pledges.
4:44
The more geopolitical turbulence we see,
4:46
the more credence that the markets will
4:47
give to those pledges actually being
4:49
honored. Mhm. Well, speaking of big
4:51
events, Alice, we've got the spring
4:53
statement this week. The Chancellor is
4:54
going to stand up. She doesn't really
4:55
want to make news with this spring
4:57
statement. She was hoping it was going
4:58
to be quite low-key. What are the
5:00
chances of that now given that she will
5:01
have to respond to the latest forecasts
5:04
um on growth, perhaps inflation. Um
5:08
those are going to be out of date when
5:09
she responds to them tomorrow, aren't
5:11
they? Yeah, absolutely. I think uh
5:13
there's every expectation that uh
5:15
inflation is going to go up. If there's
5:16
an oil price shock, um then of course
5:18
anything that the OBR has published up
5:20
to now will be completely out of date.
5:22
So, it'll be interesting to see how she
5:23
responds that. I mean, Britain is in a
5:24
really weak position to be facing a
5:27
potential international conflict and
5:29
we've pledged to increase the spend for
5:31
defense spending to 3%, but there's no
5:33
timeline for that. Defense procurement
5:35
in this country is famously a disaster,
5:37
you know, tanks that judder and make
5:39
people sick. But we had a nuclear
5:42
submarine test recently that repor-
5:44
reportedly just didn't work. Don't tell
5:46
the Russians.
5:47
Um so, yeah, we're not in a very strong
5:50
position. Um and I think this government
5:52
has not shown any ability or willingness
5:55
to be honest with the British people
5:56
about the trade-offs required if we do
5:57
want to protect ourselves.
5:59
>> What are those trade-offs? Higher taxes
6:01
or less spending elsewhere? Both. It's
6:03
probably going to be both. I mean, we've
6:04
seen that this government has been
6:05
completely incapable of cutting even a
6:07
penny off the spiraling welfare bill
6:10
because they just fundamentally can't be
6:11
honest with their own backbenchers who
6:12
just, you know, all labor wants to do
6:14
really is tax and spend.
6:17
And we're not in a position to do that.
6:19
Um so, people are yeah, people are going
6:21
to have to face up to some really
6:22
difficult decisions about public
6:23
spending, about what their own
6:24
commitment to the defense of this
6:27
country.
6:28
Simon, when it comes to the uh energy
6:30
majors, um
6:31
we've been talking about the way in
6:32
which defense company shares are spiking
6:35
uh in response to fast-developing news.
6:38
We seeing anything similar in in in the
6:40
energy sector? And is it the case that
6:42
the more these sorts of shocks remind us
6:45
about the centrality of energy and
6:47
energy security, that we might see
6:49
further shifts on the net zero debate,
6:52
for example, Ed Miliband under huge
6:53
pressure to look again at the North Sea?
6:56
Is any chance the events in the Middle
6:58
East are going to hasten that
6:59
conversation in Westminster or is that
7:01
ship sailed?
7:02
Uh well, we've certainly seen uh a lot
7:04
of the the um oil oil listed oil
7:06
companies uh see their shares rise uh
7:09
this morning. Uh companies like BP and
7:11
Shell uh largely on the back of the the
7:13
rising uh oil price that we saw over the
7:15
weekend. Whether that will uh focus
7:18
minds within the the government, I'm not
7:20
entirely sure. I mean, Ed Miliband, the
7:23
energy secretary's
7:25
uh determination to um
7:28
sort of pause all all new uh exploration
7:30
in the North Sea seems pretty dogged
7:33
uh despite all of the um huge energy
7:35
fluctuations that we've seen
7:37
um over over recent months.
7:39
And as most of the analysts um that have
7:41
been talking to City AM so far today are
7:44
just using words like volatility,
7:46
uncertainty. Is this the case that
7:49
what's happening now in the Middle East,
7:51
almost regardless of Britain's political
7:53
or military response to it, although
7:55
that's an important political
7:56
consideration domestically, is it just
7:58
going to cast aside whatever hopes and
8:01
expectations the government, the
8:02
Chancellor, the rest of us had for
8:05
anything like, uh, some more sustained
8:07
growth in the UK economy this year or is
8:09
this something that just we have to get
8:11
used to these shocks and there are
8:12
things we can do anyway to grow our
8:14
economy? Ah, look, I think if you look
8:15
at history, um, shocks like this in the
8:17
Middle East, uh, and oil price shocks
8:19
can have huge political ramifications
8:21
and completely upend everything. So, in
8:22
1973, the last time, uh, we had this
8:26
huge oil shock, it it it ended the Heath
8:28
government, right? And it ushered in a
8:30
very left-wing Labour government and
8:31
then eventually led to the winter of
8:33
discontent. So, these can have a very
8:36
destabilizing
8:37
consequences for domestic politics. But,
8:39
look, the UK does still have
8:41
good fundamentals. It's difficult to see
8:44
what the Chancellor can do because she's
8:46
not been very successful so far at
8:48
getting the economy to grow. So,
8:49
whether, uh, whether she has the agility
8:51
to sort of pivot to a domestic growth
8:53
agenda. This should be her territory,
8:55
shouldn't it? She gave her speech on
8:56
secureonomics
8:58
about a year ago. Nothing came of it.
9:00
Uh, it was a speech that supposed some
9:01
wonks and academics thought it was quite
9:03
interesting, but this this was meant to
9:04
be her territory, the relationship
9:06
between domestic security, uh, and
9:09
resilience and a stronger economy. Is
9:11
she going to try and dust down that
9:13
speech? I'm not sure what was
9:14
secureonomics about. I I never got the
9:16
impression it was about, you know, uh,
9:19
aircraft carriers and tanks and
9:21
airplanes. I thought it was more about
9:22
just being boring. Um, it was Yeah,
9:25
boring in sort of national resilience
9:26
terms, I suppose. Um, well, if that's
9:29
the case then then she needs to, as I
9:31
say, explain how we're going to get to
9:32
3% of GDP spent on defense, when we're
9:35
going to do it, and how we're going to
9:37
pay for that. And I've seen no evidence
9:39
at all that this government has the the
9:42
wit or ability to to be that honest with
9:44
the British public.
9:46
>> Necessarily there is evidence that
9:48
increased defense spending tends to be a
9:50
good catalyst for GDP in a country, not
9:53
just in the short term insofar as it it
9:55
generates more economic activity, but
9:57
also in the medium-to-long term because
9:59
defense spending tends to have
10:01
second-order technological shifts. And
10:04
we owe a lot of inventions to
10:07
fund funding for for defense startups
10:10
where they had some kind of second-order
10:11
technology that got that got repurposed
10:13
for for some other some other purpose.
10:15
So,
10:16
we we might well see that. And of course
10:19
that that we did have what was a a
10:21
record fiscal surplus in January. Of
10:24
course, Worth Point will say it's not a
10:26
a budget surplus, it's a one-off month
10:28
and we'll have deficits for the rest of
10:29
the year.
10:30
But it was a higher surplus than was
10:32
expected in that month. And there might
10:34
be questions over, well, is there a bit
10:36
of extra cash there that can be
10:37
redeployed?
10:38
Where's that Reeves' opportunity in the
10:40
in the spring statement to say, actually
10:41
we've got a couple other billion here
10:43
that we can push into into defense?
10:45
Look, this time last year her phrase was
10:47
always that the world has changed, and
10:49
we now have to change with it.
10:51
She can make the very same case again
10:52
when she delivers the spring statement
10:53
tomorrow, but it's not just the
10:54
Chancellor who'll be looking at the
10:56
economic consequences of war in the
10:59
Middle East because we already had the
11:01
likes of the AA talking about
11:03
an almost inevitable spike in the cost
11:05
of filling up the tank.
11:06
I think if oil hits $100 a barrel, it
11:09
kind of global inflation rates are
11:11
ticking up about 0.6%.
11:13
At what point does this now start to
11:15
appear in the conversations at the Bank
11:17
of England regarding their own
11:18
trajectory on interest rates? It might
11:20
well. I mean, there's been a lot of
11:22
caution in that the Bank's Monetary
11:23
Policy Committee on on making decisions
11:25
over interest rates. It was a very close
11:27
call
11:29
at the last the last meeting. It was a
11:31
5-4 vote in favor of a not cutting
11:33
rates. So the expectation was that
11:37
the MPC membership would move towards
11:40
cutting at the the next meeting, but
11:42
this has thrown this all into doubt now
11:44
and we might see higher rates for
11:46
longer. And that is also a problem for
11:47
the government because Rachel Reeves has
11:49
kind of taken ownership of the national
11:52
inflation statistics. When inflation
11:54
goes down, she claims credit for it, but
11:56
the flip side of that is when it goes
11:58
up, she has to take the blame.
11:59
>> And she claims credit for every single
12:01
rate cut even though She does. I mean
12:03
even though the bank is cutting rates
12:04
yes because inflation is is is trending
12:07
down, but also because they need to
12:08
stimulate private sector economy. So
12:10
just finally Alice on the domestic
12:11
politics of all of this,
12:13
the overwhelming position appears to be
12:15
with with one or two exceptions, quite
12:17
sound exceptions in the Labour Party.
12:18
Their position generally is anti-war.
12:20
The Green Party's position will also be
12:22
equally clear. The Tory Party is sort of
12:24
foaming at the mouth a bit, hugely
12:25
embarrassed that we weren't there
12:27
launching our own planes off our own
12:28
carriers.
12:30
How much of this is now going to shape
12:31
politics in the UK over the next few
12:33
weeks? I think it's going to shape
12:34
politics profoundly. I mean this comes
12:36
off the back of
12:38
by-election in Gorton and Denton which
12:39
was an absolute disaster for Labour.
12:42
The Greens won that we think partly by
12:45
encouraging sort of block voting
12:47
among the Muslim population. Very much
12:48
in Gaza a kind of central issue in that
12:51
by-election and I think will continue
12:53
and foreign politics therefore will
12:54
continue to influence the domestic
12:57
landscape. Keir Starmer is in an
12:58
incredibly weak position. His own
13:00
backbenchers furious with him, they
13:02
don't like him.
13:03
You know, clearly a huge mistake I think
13:05
to block Andy Burnham from standing in
13:07
Gorton and Denton cuz he'd have won
13:08
that. He would probably then have
13:10
challenged Keir Starmer for the
13:10
leadership, but I think he's going to
13:12
get that challenge anyway.
13:14
Conservatives kind of in a slightly odd
13:17
position, trying to sort of say this is
13:19
all about the by-election and all about
13:22
Labour wanting
13:22
>> They're claiming this time is rather
13:24
weak response was related to
13:26
>> But it was to buy it Muslim voters is
13:29
kind of what they're claiming. I'm not
13:30
sure that's their strongest territory. I
13:32
think um they've been quite strong in
13:34
opposing the Chagos deal which I think
13:36
is now looking madder and madder. I mean
13:38
it's yeah, it's very difficult to
13:40
understand the government's position on
13:42
why we seem to be giving away this and
13:44
really important strategic territory.
13:46
Foreign policy back on the agenda in
13:48
Westminster for sure. All right, we're
13:49
going to have to leave it there. Alister
13:51
Denby, comment editor. Simon Hunt, city
13:53
editor. Thank you very much indeed. Stay
13:55
up to date and in the know on the City
13:57
AM app and on cityam.com.
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