Monday Market Report: Conflict sends oil prices surging, airlines sinking and investors seeking cover
Susannah Streeter, chief investment strategist, Wealth Club: ”Investors are scuttling towards safe havens, seeking shelter as conflict widens in the Middle East. As attacks on Iran continue, Tehran is targeting US allies across the Gulf region in retaliatory strikes, including an RAF station in Cyprus, while Israel is targeting Hezbollah bases in Lebanon. The escalation is sending a shiver through financial markets, intensified by a sharp rise in oil prices. Brent crude has surged at the fastest rate in four years, rising almost 10% to around $80 a barrel.
Higher energy prices pile costs onto companies, and there appears to be no immediate escape valve for prices. Iran has already cut off the Strait of Hormuz to shipping companies, an essential passage for around one-fifth of the world’s oil and gas. While some Iranian and Chinese ships are reportedly still passing through, attacks on British and US tankers are a stark warning of the danger of taking this route. The effective closure of the Strait constrains crucial supplies from the Gulf, which is why prices have risen so sharply.
It will come as a blow to households, who will see prices at the pumps rise significantly. It also adds another layer of uncertainty over future interest rate cuts, given that higher fuel prices will put upward pressure on headline inflation.
Precious metals prices have ratcheted up again, with gold and silver increasingly sought after in these turbulent times. Gold has reached a one-month high, after recording its seventh consecutive monthly gain in February – the best winning streak since 1973. Back then, a severe oil shock led to a flight to safe havens. While oil prices have increased sharply, this is not yet mirroring the 1970s surge, when prices effectively quadrupled in just a few months after Gulf countries retaliated against US support for Israel in the Yom Kippur War.
However, with tensions escalating and uncertainty so high, it is far from clear how this current conflict will evolve, and prices could climb even higher. This time around, other worries are also colliding to push up precious metals prices, including high debt levels, concerns over the Federal Reserve’s independence, and questions about the sustainability of the artificial intelligence boom.
The FTSE 100 has fallen back in early trade, as the shock of war hits investor sentiment. Airline stocks have been sideswiped by the conflict, with the closure of airspace across large swathes of the Gulf causing significant disruption. Not only will the immediate chaos be costly, with so many stranded passengers and route closures, but the dent to confidence among the travelling public may also hit demand for holidays and business travel elsewhere.
Financial stocks are also sharply lower, as investors worry about the implications of prolonged fighting for economies, the potential drag on demand for borrowing, and the increased risk of loans turning bad.
However, London’s blue-chip index looks set to hold up better than some of its peers due to the resilience of its constituents in the face of heightened global tensions. Mining stocks are benefiting from the surge in precious metals prices, while oil giants BP and Shell have also risen sharply as oil prices climb. Demand for defence stocks has increased again as military spending looks set to deepen further.
With risk-off sentiment taking hold, the S&P 500 is expected to open 1.5% lower, with investors also seeking cover on Wall Street. Bitcoin is languishing at levels not seen for around 17 months, as a chill continues to pervade the crypto market amid heightened global uncertainty.”