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David Gorman of Team Asset Management offers this week’s market review
AT the weekend, yet another geo-political event took the markets by surprise, but it still did not challenge their stability.
President Trump’s decision to join Israel and bomb three nuclear refining facilities within Iran seems to have been planned, executed and considered very carefully. He also revived his Make America Great Again slogan, this time calling it MIGA (Make Iran Great Again), suggesting that the present regime is incapable of making the country prosper.
All eyes have been on what Tehran’s response would be and whether shipping would be able to continue to pass through the Strait of Hormuz. This avenue accounts for 25% of seaborne oil supplies and, if blockaded (should Iran be willing and able), could have sent oil prices up by a third or more, to over $100 per barrel.
However, the Iranians did retaliate with a symbolic (and signposted) attack on a US base in Qatar. What immediately followed was an agreed ceasefire between Israel and Iran. “Drop the bomb and then negotiate” has seemingly worked the trick for the Trump administration and Israel. Even so, many uncertainties remain. The relief in the oil market has seen prices drop by more than 10%, providing much-needed help for hard-stretched car drivers, as pump prices are now likely to fall in the weeks ahead.
Stock markets have been well behaved, with little movement in the immediate aftermath of the attack and are pressing ahead again on the ceasefire news. US equity indices are now within 3% of all-time highs. Even safe-haven money favourites such as gold and precious metals have seen subdued price action. It sadly feels as if the markets (and indeed all of us) have become conditioned to all the awful news stemming from Russia/Ukraine, Israel/Palestine and now Israel/Iran. Diplomacy is clearly better than war but a successful outcome to Iran/Israel is not yet a one-way bet.
Elsewhere, central banks were in the news, as the Bank of England decided to keep interest rates unchanged but did give a clear signal that a rate cut was on the table for August. The Federal Reserve also kept rates the same, but through chairman Jerome Powell’s press conference, markets are anticipating a “wait and see” mode until October.
With global trade tariff uncertainty and the potential for Middle East oil disruptions, any forecasts should be read with a “large pinch of salt”. The lack of inflation in Switzerland saw a cut in rates to zero from 0.1%, so are we again on the path there to negative interest rates?
Even though most investors will be watching events in the Middle East, there will be eyes on the 9 July deadline and an end to the temporary pause on certain US tariffs. Another eye-catching event is whether the Republican party can put through Congress the One Big Beautiful Bill – a sweeping piece of legislation, increasing debt and providing huge tax cuts that President Trump would like to pass before US Independence Day on 4 July?
This week the US has the latest reading for the purchasing manager indices, which continue to point to a further activity slowdown. Although a possible lifting of trade tensions may have helped, there are so many geopolitical uncertainties that sentiment is unlikely to turn quickly.
Jerome Powell, the Fed chairman, is likely to be in the news headlines again with his semi-annual testimony to Congress where he will be asked to clarify thinking on interest-rate cuts and US bank stress test results among other matters.
The Federal Reserve’s preferred measure of inflation is due to be released later in the week, which will prove a useful additive to the debate on the timing of any further rate cuts.
Finally, the NATO summit, which finishes today, takes place at the Hague, in Amsterdam. Of interest will be how members plan to make NATO stronger in the wake of the challenges ahead such as cyberattacks, critical infrastructure weakness in certain member states along with keeping the US and President Trump happy. Sir Keir Starmer is due to pledge to NATO that the UK will increase spending on national security to 5% of GDP by 2035.
