Market update: Trump talk pushes oil down, but markets remain unsettled
Susannah Streeter, chief investment strategist, Wealth Club: “A fresh dose of Trump talk appears to have helped calm energy prices, with reports the US president intends to end the war in the Middle East even if a key oil chokepoint remains controlled by Iran.
Brent crude, the international benchmark, has dropped to $107 a barrel, but even at this level it remains painfully high for economies to deal with. Asian countries highly reliant on energy imports are still bracing for prolonged disruption, which is partly why South Korea’s Kospi and Japan’s Nikkei index are still deep in the red.
Although futures markets indicate a bounce higher for the Footsie and Wall Street, reading too much into Trump’s latest comments may be unwise. He appears to be driven by a desire to calm market tension and bring down energy prices as the mid-term election campaign looms. Trading is set to stay volatile amid conflicting signals, indicating that this is a complex conflict which will be difficult to resolve. Israel’s Benjamin Netanyahu has his own agenda and has suggested the military aims are only halfway to being achieved, and it’s likely to be hard going forward.
Iran is still deploying drones across the region, hitting a huge oil tanker docked in Kuwait. Attacks on energy infrastructure in the region will take years to repair, which looks set to keep energy prices elevated even if there is a swift resolution. Strikes are now hitting wider targets, with aluminium producers in Bahrain and the UAE affected. The damage has pushed aluminium prices close to the highest in four years, which looks set to increase costs for manufacturers of a range of products – from small electronic goods to vehicles. Supplies were already constrained due to the blockade of the Strait of Hormuz, and concerns are rising about longer-term availability of the metal.
Costs for UK consumers were already rising just as the conflict broke out, with shop price inflation edging higher. It rose to 1.2% in the twelve months to March, above February’s reading of 1.1%. As commodity costs rise again, it will pile pressure on producers. They’ve already had to absorb significant increases over the last few years, and there’s a limit to how much they can delay passing these higher overheads on to consumers. The increase in the minimum wage, higher payroll costs, and the impact of rising packaging taxes are also increasing the burden for manufacturers and retailers. Adding to the expensive mix are sharply higher energy costs and rising freight prices.
As consumers prepare for higher prices, the Bank of England will be watching inflation expectations closely for signs that they’ll demand higher wages to compensate. But with the economy already stagnating before the conflict began, and demand for goods and services so sluggish, the risks of a wage spiral emerging do not at this stage look too severe. Nevertheless, financial markets are still pricing in two to three rate hikes this year, although much will depend on the duration of the Iran conflict.”