Stockwatch: how serious is Middle East crisis for investors?

Shares are trading firmer this week despite the near-existential scale of hostilities between Israel and Iran that pushed oil prices up 8% by early yesterday. They then dropped 4% with Brent crude at $71.75 a barrel, as the generally optimistic tone in markets figured that the conflict will more likely restrict the conflict to these foes rather than any wider extension. Today, Brent is slightly firmer at around $72.

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Early today, it is reported that the White House is discussing with Iran the prospect of resuming talks this week on a nuclear deal, which ought to steady nerves further after last Friday’s attack on Iran by Israel caught everyone by surprise.

Chief risk is an overall tilt towards stagflation

Equities have stabilised recently, helped by overall decent first-quarter results and outlook statements better than feared. Yet the prospect remains of renewed trade tariff conflict with the 9 July US deadline approaching. Stock markets need radically higher oil prices like a hole in the head, just when global growth rates are slowing amid tariff uncertainties and where scope for multiple interest rate cuts this year may be over-hopeful.

Specifically for the UK, sustained higher oil prices contribute to an increased likelihood of tax rises later this year if the chancellor is to stay within her fiscal rules. While the Bank of England voted narrowly in May to cut its base rate by 0.25% to 4.25%, this was promptly questioned after April’s inflation rose to 3.5%, hence further cuts seem unlikely for a while.

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Global market forces seem to be keeping 10-year interest rates at a higher level, where you might normally expect to see a fall in response to a major crisis. This is another factor why there is no scope for oil to rise.

As ever when major hostilities break out involving Iran, the media finds someone willing to aid stories about attacking Saudi oil facilities and blocking the Strait of Hormuz through which around 20% of global oil is shipped. Yet oil and equity traders probably figure such moves would be illogical by Iran, which operates a shadow fleet of tankers carrying around 80% of its oil exports to China. Such moves would also invoke retaliation by the US, which has strong naval assets in the area.

Instead, there could be a resumption of attacks on shipping by Houthi’s in Yemen, as Iranian proxies, but Iran would still tread very carefully versus President Trump. Perhaps there is a modicum of virtue in his aggressive threats after all.

It is risky to assume, but the situational logic here implies that the US has enough control over Iran and Israel to mitigate the threat of a wider war, which, like tariffs, could mean a negotiated way forward is likely after initial hellfire.

Loss of haven appeal for US dollar

Another key factor arising from this episode is the dollar rising only very modestly in response to Friday’s outbreak of hostilities.

There is partly excess US debt to blame, as well as the actions of the US president. There’s an argument that Trump has focused excessively on punishing friendly partners such as Canada and soft domestic targets via immigration raids and deportations, rather than solving major conflicts such as Russia/Ukraine and Israel/Iran.

The US also seems effectively at risk of civil war between liberals and modern conservatives, as demonstrations versus authoritarian state measures spread.

So, the current Israel/Iran crisis seems a test of whether Trump is chiefly a noisy distraction or has some Machiavellian value bringing warring sides to compromise.

Otherwise, it puts into question the validity of holding US equities or bonds – offering more by way of diworsification? You might be better holding UK company shares, given the UK may continue to fare better in tariff negotiations, and take advantage of ongoing US takeover interest.

Gold prices lose some sensitivity

The price of gold is this morning slightly softer at $3,388 an ounce having lost most of Friday’s meek 1.5% rise. This is in context of a sideways-volatile trend the last two months following a strong chart from $2,025 in February 2024.

It appears to show some fatigue among gold buyers, or more likely perhaps with uncertainties having become the new norm. If so, then physical gold may lose some appeal as a hedge. It will be interesting to see how it continues to trade relative to this latest Middle East crisis.

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Overall, elevated prices remain excellent for mining equities. In April I made a “buy” case for Greatland Gold (LSE:GGP) at 14.2p, on a rationale that higher prices should radically transform losses, and also as production from two Australian acquisitions kicks in.

Last week, the shares rose to 17.3p and they trade at 17.9p this morning - not in response to Middle East hostilities but a site visit in Australia linked to raising £24 million equivalent there, and also a £7 million UK retail offer in support of longer-term growth.

UK takeovers imply domestic valuation backstop

Metro Bank Holdings (LSE:MTRO) is the latest in the frame after a weekend press report citing private equity group Pollen Street Capital having made an approach. But despite the shares rising 18% to 133p, there's been no announcement from the company.

That a UK bank should be targeted right now is interesting given that banks tend to be more sensitive to the economic cycle. While I expect the chief motivation is Metro having rationalised its operations under a new CEO and moved on from past problems, a lender is exposed to cyclical downturn should some loans sour.

It’s unclear whether any offer price could be agreed amid such uncertainty that could make sense both for a buyer and Metro shareholders right now.

Mind, Pollen Street Capital is a focused operator in financial services and a major shareholder in Shawbrook – a mid-sized bank that has previously approached Metro and reportedly also recently engaged Starling Bank. It is therefore relatively more likely to engage banks.

In May, I retained a “buy” stance on Metro at 112p after its first-quarter 2025 update cited a significant increase in underlying profit on the fourth quarter of 2024, and three directors bought just over £600,000 worth of shares between 84p and 90p in March and April. Of itself, this implied confidence in Metro’s outlook despite risks with the UK economy.

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Metro being 53% owned by a Colombian billionaire means any approach hinges on his agenda and whether they’re minded to take a profit after the 2023 refinancing, or if there is another agenda.

That Metro has not confirmed the speculation - whereas instruments-maker Spectris (LSE:SXS) did on 9 June - suggests the approach may not be as firm.

Further to my “buy” stance on Spectris at 3,200p on 13 June, after the market close last Friday it was announced that Kohlberg Kravis Roberts, another US private equity group, had mooted a possible cash offer on 5 June. However, the board rejected this and no further proposal has been made by KKR. That announcement was similarly in response to a news report, so it’s unclear whether advisers at Spectris and Metro have different approaches.

Investors generally can feel quite miffed at a lack of overall consistency from companies on disclosure about takeover approaches, especially those selling stock who are unaware that any proposal had been made.

The offer for Spectris has involved private equity firm Advent ratcheting up its cash terms of a possible deal - as can easily happen in takeover approaches – hence there is a case for prompt disclosure. Boards would presumably say most come to nothing and would cause unnecessary distraction.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.