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Team Asset Management investment manager Francesca Le Feuvre offers this week’s market review
AS the US-Iran conflict enters its fifth week, Americans are starting to feel the impact well beyond the petrol pump. Surging oil prices, driven by the Strait of Hormuz blockage, are forcing companies to adjust operations and pass on costs.
Airlines are scaling back flights and warning of higher fares, the postal service is planning a fuel surcharge and major household manufacturers, like 3M, are raising prices. The spike in energy costs, combined with higher import prices and growing stagflation concerns, is also shifting expectations for the US Federal Reserve, with markets now assigning roughly a 50% chance of a rate hike by the end of next year.
Closer to home in the UK, money markets are factoring in three rate rises of 0.25% before the end of this year. Just a month ago the same market was suggesting two quarter-point cuts. Already, this has immediately impacted some fixed-rate mortgage deals, which have had to rise, and does not augur well for the previously expected bounce in property prices.
Tensions in energy markets remain elevated as Donald Trump delays a decision on potential military action against Iran, extending the deadline but doing little to ease prices. With Brent crude prices around $110 a barrel, oil markets continue to reflect a sizeable risk premium amid a deep diplomatic stalemate.
Trump has floated the idea of taking control of Iran’s oil by seizing its strategic export hub on Kharg Island, comparing the idea to recent US moves in Venezuela. While he stressed it would be risky and might require a prolonged presence, he insisted it remained an option amid ongoing diplomacy.
The ripple effects of global tensions are also being felt in China. Industrial profits surged early this year, rising 15% in January and February. High-tech manufacturers led the gains, with earnings in sectors such as semiconductors and drones jumping 60%, while raw material producers recorded sharp profit increases. The Middle East conflict remains a key concern for China, but their energy cushions and ongoing oil imports are helping limit the economic impact.
Back in the UK, inflation held steady at 3% in February, the final reading before the Middle East conflict began, with core prices nudging slightly higher. Rising clothing costs were offset by falls in petrol, collected before oil prices surged following the Iran war. The pound slipped slightly on the publication of this data, while the country’s reliance on imported energy leaves it vulnerable to higher global oil and gas prices.
Commodities are not immune to the geopolitical tensions. Gold has slipped as persistent inflation concerns, reinforced by higher energy prices, support expectations that the US Federal Reserve will maintain elevated interest rates. With no yield attached, gold has become less appealing, while industrial metals such as copper have weakened as investors grow cautious on global growth and demand.
Digital assets have also faced headwinds. Bitcoin has extended its recent decline, with sentiment hit by both geopolitical tensions and regulatory developments in the US. Proposed new regulatory rules could limit the appeal of stablecoins by restricting yield-generating features. While the changes may bring clarity, they risk undermining a key growth driver for the sector, and other major cryptocurrencies have followed Bitcoin lower, reflecting a cautious tone across digital markets.
On the corporate front, a few well-known companies saw notable moves. Shares in Avis Budget Group surged by half, with investors betting that ongoing travel disruption will boost demand for car rentals.
Dell Technologies moved 10% higher, supported by optimism around its positioning in artificial intelligence. In contrast, cosmetics group Estée Lauder shares fell 22% with concerns that potential deal activity could prove costly and distract from its ongoing restructuring efforts.
A US jury found Meta (Facebook) and Alphabet (Google) legally responsible for designing platforms deemed addictive and harmful to teenagers without sufficiently warning users about those risks. The potential fine will be split 70/30 respectively between the two, but both companies are considering an appeal.
Looking ahead, the market will be focusing on whether the US decide to put boots on the ground, as thousands of young American troops are ready to intervene in the Gulf.
On Good Friday, the March US jobs report will be released. While the Federal Reserve has a dual mandate of price stability and optimum employment, it will be interesting to see whether the focus temporarily moves away from inflation, where the risks are obvious given the events in the Gulf.
Finally, Eurozone headline inflation is likely to return above 2% in March, but this will
probably just be the beginning of the major inflationary impulse as the impact of energy prices intensifies in the months ahead.
