Market report: G7 summit opens with Iran deal under scrutiny
Susannah Streeter, chief investment strategist, Wealth Club: ‘’The immediate euphoria following the Iran deal is wearing off, but there is relief that central bank moves to constrain inflation don’t look too onerous. London’s FTSE 100 looks set to largely tread water in early trade, while investors on Wall Street look set to be in a more cautious mood after yesterday’s spate of buying.
Attention is being trained on the G7 summit in Evian-les-Bains, where the intricacies of the agreement are expected to be explored amid concerns that, if it’s too limited in nature, tensions could flare up again. The agreement establishes a 60-day framework for broader negotiations over Iran’s nuclear programme. But the location of Iran’s highly enriched uranium stockpile remains unclear, and the limited ability of inspectors to monitor future activities is prompting worries that a hastily negotiated deal could leave Tehran with a pathway to rebuild its nuclear capabilities.
The operational realities of policing the deal are also in focus. The UK and France have already been pushing the need for a multinational naval mission to keep the Strait of Hormuz safe for shipping, although right now it looks unlikely that such a plan would get Tehran’s support. With mines still littering the Strait, and very precise routes needing to be followed to avoid them, flows of crude are still likely to be reduced in capacity while insurance costs are set to remain high. There also remain concerns that tolls could be imposed on the Strait by Iranian authorities, which would keep shipping costs elevated.
Oil prices, for now, are hovering at the lowest level in two months, with Brent crude around $82 a barrel, but it’s still trading at a premium compared to pre-conflict levels, demonstrating the ongoing uncertainties about supplies. The Bank of Japan has raised its key interest rate to a 31-year high as a precaution, to try and stop energy costs being embedded more deeply across the economy. The move – increasing the short-term policy rate to 1% from 0.75% – was widely expected, but it’s a step-change in monetary policy for Japan, given it pushes borrowing costs to levels not seen since 1995. There was some relief that the move wasn’t more hawkish, with even a 50-basis-point hike having been mooted. That’s why investors responded with relief and stocks rallied even higher. There are expectations that the Fed and the Bank of England will hold off from rate hikes this week and adopt a wait-and-see stance instead, which may help keep the general market mood buoyant.
Defence stocks are likely to be in focus this week amid all the talk among G7 leaders about geopolitical tensions and efforts to end conflict. Ukraine is expected to be one of the central topics at the summit, and while a breakthrough is not expected, European leaders will be trying to secure continued US engagement and demonstrate ongoing Western unity in support of Kyiv. The discussions come at a time when attacks have been intensifying, but diplomatic efforts have failed to build a path towards a ceasefire.
European leaders are likely to press president Trump to maintain military and financial backing for Ukraine while preserving pressure on Russia through sanctions. For Europe, the conflict remains a critical security issue that has implications for defence spending, fiscal policy, energy security and long-term economic resilience. The row over the military budget in the UK will be an embarrassing issue for Keir Starmer’s government, and may justify the Trump administration’s jibe that Europe needs to spend a lot more on its own defence rather than going cap in hand to the US.”