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Andrew Gillham, head of fixed income at Team Asset Management, offers this week’s global market review
GLOBAL stocks sank on Monday following the US and Israeli strikes against Iran, which eliminated senior figures in the regime, including Ayatollah Ali Khamenei.
While the possibility of US military action had been flagged from some time as talks on Iran’s nuclear programme faltered, the scale of the retaliation was a surprise, especially the attacks against Bahrain, Qatar and the UAE, increasing the risk of a regional war.
European natural gas prices jumped almost 50% after QatarEnergy, the world’s largest LNG company, halted production following drone strikes on its facility in Ras Laffan Industrial City.
Brent crude also climbed 8% to $78 a barrel with Iran’s Revolutionary Guards warning ships not to pass through the Strait of Hormuz.
The narrow strait between Iran and Oman serves as a critical transit route for global crude oil, with around 13 million barrels passing through it each day, approximately 30% of all seaborne oil flows.
Markets fear that a prolonged shutdown, or further attacks on Saudi Arabia’s oil infrastructure, could trigger a 1970s-style energy shock, sending oil prices into triple digits and gas prices to the record highs of 2022 in the wake of Russian invasion of Ukraine.
In equity markets, airline and travel stocks were among the biggest fallers, as thousands of flights were cancelled and airports were closed, including Dubai International, one of the biggest airport hubs in the world. Shares in International Consolidated Airlines Group, the owner of British Airways, and EasyJet fell 5.1% and 3.4% respectively and across the Atlantic, United Airlines tumbled 3%.
Hotel operators, including InterContinental Hotels (-4.2%) and Marriott International (-3.3%) also fell.
Aside from energy, defence stocks were standout performers to the upside on Monday. London-listed BAE Systems and New-York-listed Northrop Grumman each gained more than 6%.
Precious metals also attracted demand from investors seeking shelter from the storm and gold climbed to $5,300 an ounce, its highest level in more than a month.
However, government bonds, another traditional safe-haven asset, fared less well and sold off on concerns that higher energy prices will lead to higher inflation.
Going into the weekend, money markets were pricing in more than an 85% probability that the Bank of England will cut interest rates in March, but those odds have been cut to less than 25%. It will be very difficult for policymakers to justify lower interest rates if energy prices remain elevated for an extended period.
Prior to the attacks, concerns about overspending on artificial intelligence infrastructure and AI’s threat to traditional software companies remained a key area of debate.
Shares in Nvidia, the bellwether for the AI industry due to its chips’ role in running the technology, tumbled nearly 10% at the end of the week despite a blockbuster earnings report on Wednesday evening.
The world’s most valuable company reported revenue of $68 billion for its fourth quarter, up 73% from the same period a year ago, and forecast revenue will rise to $78 billion in the current quarter with chief executive Jensen Huang asserting that “our customers are racing to invest in AI compute”.
However, the negative market reaction suggests that there are major concerns of an AI bubble and the eventual pay out from the massive capital expenditure.
Looking ahead, this week’s economic calendar will probably be overshadowed by events in the Middle East. The main event is Friday’s release of the US nonfarm payrolls report for February.
