Monday market report: Fresh equity rout as oil rises amid escalation of Iran war threats
Susannah Streeter, chief investment strategist, Wealth Club:“Far from providing reassurance that the conflict could be resolved, Trump’s ultimatum to Iran over the Strait of Hormuz has sent another jolt of worry through markets.
The FTSE 100 has fallen sharply in early trade, down another 1.5% following on from Friday’s slide. Investors are fretting about the impact of a prolonged war on economies around the world. Wall Street is set to open lower as pessimism continues to spread. The war has become intractable, and any possibility of shipments resuming in a meaningful way through the vital waterway seems a dim and distant hope right now. Meanwhile, the threat of further long-term degradation of crucial energy infrastructure is looming.
Brent Crude shot up to $115 a barrel as traders assessed the hard yards needed before the Strait reopens. Tehran has threatened to wreak devastation on oil and gas facilities across the Middle East if the US carries out its threat to take out Iran’s power plants. Now the financial sector is in Iran’s sights, with a senior official warning that financial institutions holding Treasuries, US government bonds, could be hit, in an extension of strikes targeting US allies in the Gulf. Iran is a wounded bear, lashing out at an increasing number of targets in its fight for survival.
The International Energy Agency has warned that the world is facing its biggest ever energy shock, and economies are scrambling to limit the fallout. In the UK, Prime Minister Keir Starmer will chair an emergency COBRA meeting to assess the likely damage, having warned that energy prices are inescapable.
The repercussions look likely to include sharply higher borrowing costs for companies, consumers and the government. UK 10-year gilt yields have retreated a little after nudging 5% for the first time since the global financial crisis. Investors in UK government debt are reacting to expectations that the Bank of England may be forced to hike interest rates multiple times this year. Policymakers will want to stop the insidious creep of higher energy costs becoming embedded in prices across the economy. The government is in a tight spot: its interest repayments on debt are already onerous, limiting the fiscal firepower that can be deployed to help households and firms deal with potentially crippling bills. Other spending priorities may have to be reassessed, or fresh tax rises could be on the cards.
As inflation expectations are sharply reassessed, it’s putting gold under even more pressure. The precious metal has experienced a brutal drop as the conflict has escalated. Gold is usually seen as a safe haven in times of severe conflict, but a collision of factors is pushing down demand. Essentially, the opportunity cost of holding gold is mounting. As government bonds, in particular Treasuries, see yields rise, it makes gold less attractive given that gold pays no interest. Investors who have made losses elsewhere in volatile markets are selling to cover positions, while the strengthening of the dollar also makes gold more expensive for buyers in other currencies.”