Escalation concerns trigger sell off, as UK set to be worst performer in G7

Headline risk is dominating once more, Brent crude is around the $106 per barrel mark after a raft from headlines from President Trump that suggest the conflict is escalating rather than tapering off. Trump said that the US is planning operations, including troops on the ground, for one ‘final blow’ in Iran.

This is quite the shift in  rhetoric from the President, and highlights how complex it will be to 1, reach a peace deal, since both sides are tricky negotiators, and 2, the prospect of troops on the ground suggest a prolonged war and not one final blow at Iran.

Oil is king once more

When the oil price surges, the market playbook stays the same: stocks and bonds sell off. Gold is also under pressure and is lower by 1.3% so far on Thursday, and the dollar continues its recovery and is currently trading around 99.60 for the dollar index, after falling as low as 98.80 earlier this week.

Peace trade comes under pressure and weighs on gold price

The peace trade is coming under pressure today and European stocks are down approximately 1%. The energy sector is the only sector in the green for the FTSE 100, and the materials sector, which includes gold and silver miners is down sharply, led by a 4% drop for Antofagasta, Fresnillo and Endeavour.

Next shines as it raises profit outlook in the midst of an economic shock

It is not all doom and gloom, Next is higher by 5% today after it raised its profit forecast for the year. This is eroding some of the losses for the stock so far this year, it is currently down 7% YTD, as consumer discretionary stocks come under pressure from rising cost pressures and weaker growth forecasts.

How can Next raise profit forecasts in this environment?

Next has a habit of doing this, and it tends to set the bar low before raising it on earnings calls. Stronger full price sales in January and better clearance rates in sales at the start of this year also added to the improved profit outlook for 2026. There is still a lot of uncertainty, and Next said it was not well placed to make predictions, although it expects the war in the Middle East to have ripple effects on consumer demand and costs and sales prices. Thus, the longer the war drags on for, the harder the blow for UK’s consumer sector.

OECD predicts inflation at 4% for UK this year

The OECD is the first major global economic organization to quantify the risks to growth and inflation for the global economy from the war in the Middle East. Its assessment does not make for easy reading. It sees the average inflation rate for the G20 jumping to 4%, higher than the 2.8% expected in December. US CPI is expected to jump to 4.2%, according to the OECD, an increase of 1.2% since December. This is higher than expectations for a 4% CPI rate for the UK this year, which is a whopping 1.5% increase on their previous forecast.

The US and the UK are expected to experience inflation rates around the levels of India and Brazil, traditionally high inflation economies. In contrast, the OECD’s upward revisions to CPI for the euro area are moderate, and Germany is expected to see inflation peak at 2.9% this year. Interestingly, the OECD expects French inflation to remain below the ECB’s target rate of 2% for the rest of this year, as it is coming off a lower base.

No rate hikes from BOE, according to OECD

The Fed and the BOE are both expected to remain on hold this year, and the ECB and the BOJ are both expected to hike rates once in 2026, on the back of surging inflation pressures. The interest rate futures market is ignoring the OCED’s expectations for the BOE to remain on hold and has increased the probability of rates hikes for the UK this year. The swaps market is now expecting 3 hikes from the BOE, at one stage this week it had fallen to 2 hikes.

UK on course to see weaker economic growth than France and Germany this year

There is no change to the OECD’s forecast for global growth this year, as the G20 growth rate gets propped up by India and Indonesia. However, the UK is set to be the weakest G7 economy this year, and the third weakest in the G20 year, with the OECD revising down its GDP growth forecast to 0.7% for 2026. This is just above Russia, and Italy is set to have the weakest rate of growth this year at a mere 0.4%. France and Germany are both expected to grow at a faster rate than the UK at 0.8%. This is a reversal from 2025 with the UK on track to have easily outpaced growth rates for Germany and France last year.

The OECD was at pains to say that the forecasts could be revised depending on the outcome of the war. Although no recessions are predicted for the world’s largest economies, they remain at risk and this war and energy price spike is a test of global economic resilience.

Chart 1: OECD growth forecasts, UK is set to be one of the weakest G20 performers this year

Source: OECD