David Gorman, investment manager at Team Asset Management, offers this week’s global market review
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EARLIER last week, there was a distinctly positive feeling about financial markets driven by the agreed ceasefire in Iran.
Fixed interest prices reacted positively, with yields falling as future interest rate expectations nudged downwards with oil prices. However, in the UK, money markets today signal two rate rises of 0.25% by the year end, which are impacting shorter fixed-rate mortgages.
Equity prices were also up, with investors hoping that the ceasefire and peace negotiations would bring a rapid end to the oil supply dislocation through the Strait of Hormuz.
One piece of good news for consumers is that Saudi Arabia announced that its East-West pipeline is once again operating at full capacity, equivalent to seven million barrels a day, just days after an Iranian attack damaged the infrastructure.
The market would traditionally be focusing on the US first-quarter results season that starts this week. Investors may be distracted from company reports, but it is worth saying that consensus earnings growth is expected to be a bumper 19%.
Both energy and materials sectors are doing heavy lifting, with forecasts more than tripling since the start of the year. Technology shares are likely to deliver a whopping 43% rise in earnings compared with earlier projections of just 30%. Areas where reduced forecasts exist include the industrial and consumer sectors, where energy prices are a tax on production or consumption.
Subsequently, the failure of 21 hours of weekend talks between the Iranian and US negotiators has dampened spirits with oil prices surging again through the $100 per barrel level. This should not have been a surprise, given the fact that the two countries have had no diplomatic relations for 47 years and have been engaged in a 40-day war.
The deadlock has prompted the US to re-escalate the position by imposing its own blockade of the Strait of Hormuz. Currently, between 15 and 20 boats a day are going through. This figure was more than 300 before the war.
The intention seems to be to starve the Iranian government of its major source of revenue and demonstrates that Iran is not the only one that can control the strait each day.
The reported $1 per barrel Iranian toll for safe passage will clearly place pressure on Iranian allies such as China to push Iran back to the negotiating table. At least, that is what Donald Trump wants. However, it increases the stakes in this power game where unexpected responses or even a return to more missiles cannot be ruled out. What we do know is that it adds even more pressure on global oil flows while the war lasts longer.
Turning to the real world, economic numbers are now being impacted by the six-week war. For instance, inflation is now discernibly up with the index for energy prices rising by 10.9% in March.
Although core inflation is stable, as time passes, continuing energy costs will feed through to higher numbers in the months ahead.
Consumer confidence in the US has fallen by 9% as a result of the fallout from the Iran conflict and a large rise in the year-ahead inflation expectations.
So far, other economic numbers are holding up simply fine but there are worries that eventually the current uncertainties will hit activity levels and investor confidence, which has stayed remarkably resilient to date.
During the week we have results from major companies such as LVMH, Goldman Sachs, JPMorgan, Johnson & Johnson, Netflix and PepsiCo. These are likely to pale into insignificance compared with the latest news from the White House, Tehran and the Strait of Hormuz.
