Market report: Trade tensions and geopolitical stalemate add to inflationary concerns
Susannah Streeter, chief investment strategist, Wealth Club:Trade tensions and geopolitical stalemate are adding to inflationary concerns – pushing prices up across a large basket of commodities, which will feed through to household and business costs. The moves are adding to the note of caution reverberating on financial markets, as investors assess the likelihood that interest rates may have to stay higher for longer to keep a lid on consumer prices.
Tariff wars have reared up again after Canada slapped billions of dollars of retaliatory tariffs on American goods, after talks with the US administration collapsed. The former trade allies have turned foes, with President Trump turning up the heat, and the latest measures are likely to add another layer of uncertainty for businesses and consumers. Canada’s retaliatory tariffs on around $20bn of US goods came into effect today, with duties ranging from 15% to 50%.
Even the threat of further tariffs is distorting market prices, with copper futures reaching a record high as US importers stash the metal in warehouses amid expectations of higher duties ahead. Operational issues at major mines have also conspired to push prices higher, amid concerns about supply backlogs as demand surges for a metal so sought after for the world’s electrification drive and the build-out of AI infrastructure.
While this provides support for mining stocks, it’ll add to manufacturing costs, with gadgets small and large already set to rise in price due to chip shortages. Meanwhile geopolitical tensions are also adding to inflationary pressures. The lack of success in the Russia-Ukraine talks has led to renewed concerns over wheat supplies. Ukraine, known as the breadbasket of Europe, has already seen exports sideswiped by the war. With hopes dashed for a faster resolution, there are renewed concerns that export capacity will be constrained due to Russia’s denial tactics over Black Sea shipments. Conflict is colliding with the effects of El Niño-related drought, exacerbating potential crop shortages. This toxic combination of war and weather risks driving up food prices next year, just as consumers are already feeling the squeeze from higher energy and other household costs.
Oil and gas prices are painfully elevated, with Brent crude heading above $98 a barrel and wholesale gas prices shooting sharply higher as the market prices in heightened risks around the Strait of Hormuz. Talks between Iran and Oman to manage shipping through the key Strait of Hormuz appear to be making good progress and while that’s encouraging in the short term, it could allow Iran to wield much more control over this key waterway in the future, paving the way for potential future disruption. President Trump has previously threatened to bomb Oman if it got in the way, and although he’s gone quieter on the subject recently, the US still appears determined to call the shots when it comes to transit through this vital waterway.
Iran has continued attacking US allies, with Saudi Aramco’s facilities in Jazan near the Red Sea hit again yesterday and Tehran threatening further attacks on infrastructure in the region. This has again heightened worries about future supplies, particularly gas heading towards Europe and Asia.
European gas storage levels are below the seasonal average, leaving the market vulnerable as winter months approach. Qatar’s extension of its suspension of shipments means that those levels can’t easily be replenished, with supply concerns amid high demand pushing European and UK gas prices back up to levels not seen for three and a half years. For now, gas prices are still way below the spike we saw in the months following the outbreak of the Ukraine war, and Brent has so far failed to breach the psychologically important $100 threshold. Alternative export routes, some oil still moving through the Strait of Hormuz, rising production from outside OPEC and softer demand are helping to cushion the supply shock to some extent.
Higher energy, food and manufactured goods prices look set to put fresh pressure on finances, increasing the political pressure on governments to step in and help shield households and businesses from the hit. But ministers are in a tight spot, with borrowing costs still elevated, with yields on government debt stubbornly high. So they have little room to offer more support without raising taxes or squeezing spending, both of which could put another brake on an already fragile economy. Still there are glimmers of resilience with data over the past week showing the services sector continued to expand in August, while the eurozone economy is also holding in expansion territory, with manufacturing showing signs of improvement. Across the Atlantic, the US looks particularly robust, with employers adding 162,000 jobs in August, helped by a surge of construction activity partly fuelled by the mega data centre build out to power the AI trade.
So while the latest energy and trade shocks are clearly a threat to growth, there appears to be some underlying momentum across economies, which could help absorb some of the price pressure.’’