Monday market report: Footsie slips after fresh Iran skirmishes but Wall Street set to power higher
Susannah Streeter, chief investment strategist, Wealth Club: “The FTSE 100 has slipped back in a sigh of disappointment at the start of the month as a long-term solution to the Iran conflict appears elusive. But stocks on Wall Street look set to power higher, as AI enthusiasm continues to surge and tech giants uncover lucrative new revenue streams.
easyJet is at the centre of a storm of speculation over a takeover, with the rumours lifting shares sharply in anticipation of a potential deal. The airline has been hit by a severe bout of turbulence sparked by the war in Iran and now private equity firm Castlelake appears ready to pounce. The airline has been battling headwinds from escalating tensions in the Middle East, which have rattled consumer confidence, driven up fuel costs and cast a shadow over the outlook for European travel demand.
As a result, its valuation had dropped to a level not seen for more than three years, leaving the company looking vulnerable despite its strong liquidity position. Castlelake clearly believes the market may be underestimating easyJet’s longer-term earnings potential and the resilience of its network. easyJet appears open to discussions but does not seem in the mood to accept a bargain-basement offer, calling the bid “highly opportunistic”. Castlelake is well known for investing in aircraft leasing and aviation finance. It already owns a small stake in easyJet and, under UK takeover rules, would need to offer at least 403.23p a share if it proceeds with a formal bid. The move is still at a very early stage and, while there is no certainty an offer will materialise, it clearly fits well within its portfolio. This is fresh evidence that the British markets are increasingly becoming a hunting ground for sophisticated institutional investors, with UK-listed stocks continuing to trade at lower valuations than other markets.
A big part of easyJet’s recent problems stems from painfully high jet fuel prices. Crude moves remain the big gauge of sentiment tied to hopes for peace in the Middle East. Brent crude futures nudged $94 per barrel, partly reversing steep losses as uncertainty crept back into negotiations. A familiar pattern has emerged – reports of progress on a draft deal swiftly followed by fresh military skirmishes. American forces attacked Iranian military sites earlier, and Tehran retaliated with missile and drone attacks on targets in Kuwait. Energy markets are likely to remain skittish amid this unpredictable backdrop. Compared to pre-conflict levels, prices are still highly elevated given the severe disruption to supplies and expectations that it could take well into next year to repair the bulk of the damage to facilities. However, crude remains sharply lower on the month, down 18% from the spikes in early May, amid expectations that some form of resolution will eventually be reached and a wider regional escalation avoided.
Hopes for progress, albeit faltering, towards a peace deal have helped calm jitters in the bond markets. UK 10-year gilt yields are hovering under 4.8% at the start of the month, close to their lowest level since mid-April. While the leadership challenge saga rumbles on in the UK, recent remarks from potential front-runner Andy Burnham advocating fiscal restraint have helped soothe concerns about the public finances. Recent economic readings also indicate the economy is becoming increasingly fragile. This is fuelling expectations that the Bank of England will adopt a more cautious approach to monetary policy. Expectations for multiple hikes have been pared back, with two, not three, now priced in this year, and even if rates are pushed higher in the short term, markets expect a cut to arrive in the spring.
While sentiment remains subdued in London, Wall Street is poised for another injection of optimism, given its huge tech exposure. Strong earnings have added fresh momentum to a rally fuelled by expectations that demand for AI infrastructure will remain robust.
Nvidia’s latest push into AI-powered personal computers marks a bold attempt to extend its dominance beyond datacentres and into consumers’ everyday lives. The unveiling of the RTX Spark chip reinforces Jensen Huang’s vision of PCs evolving from simple productivity tools into hyper-intelligent digital co-workers. While strategically significant, investors are likely to view the move as a longer-term growth opportunity rather than an immediate earnings driver. For now, Nvidia’s fortunes still depend overwhelmingly on relentless global demand for AI infrastructure and data centre computing power.”