Market report: Trump deal sees oil dip slightly, but Middle East crisis keeps prices high
Susannah Streeter, chief investment strategist, Wealth Club: ‘’Trump’s deal with Putin to import Russian diesel helped ease oil prices slightly, but it has failed to make a significant dent in the cost of crude, given the situation in the Middle East remains so tense. Brent crude had edged down to $103 a barrel but has begun rising again, lifting back above $104 in early trade on Monday. It remains more than 40% higher than before the conflict with Iran broke out. The devastating Houthi attacks on Riyadh airport demonstrate how complex the crisis has become, with the Iran-backed rebels increasingly audacious and destructive in their strikes on Saudi Arabia.
The slight dip in prices does appears to have delivered some respite on financial markets, with president Trump clearly anxious to bring down fuel costs ahead of the crucial mid-term elections. The FTSE 100 has started the week on the front foot, but there is still nervousness around. On Wall Street, stocks are set for a brisk start as earnings season gets underway and expectations remain high for robust numbers to feed through. Like the economy, this is set to be a K-shaped performance, with tech, energy and financial stocks likely to see bumper earnings roll in, while the consumer discretionary sector is likely to feel the pain of more cautious consumers.
Big Wall Street banks are first to roll out their earnings and are likely to have benefited from a volatile trading environment, with intense M&A activity also boosting fees. Focus will be intense on mega-tech earnings for any more hints that the massive investment in the AI infrastructure build-out will deliver returns quickly enough to justify the huge valuations companies are currently enjoying.
With mammoth data centre construction projects underway across the United States, the AI boom is drawing heavily on resources and labour, helping to keep the inflationary fires burning alongside higher energy costs. For now, the AI build-out is helping keep the growth engine running, but the worry is that any shift down a gear will make America’s debt problem more onerous. If the economy keeps growing faster than the cost of servicing its debt, the government can manage that burden more easily. But if growth falters while interest rates remain elevated, the pressure on government finances will intensify. This is the conundrum facing so many economies right now, and it is keeping officials at the International Monetary Fund and the World Bank extremely wary as they meet in Bangkok this week.
Bond markets in the US are closed today for Columbus Day/Indigenous Peoples’ Day, but government bond yields will be watched closely again this week, given they are still hovering around multi-decade highs. Bond vigilantes are watching government moves closely, particularly in the UK in the run-up to the crucial Autumn Budget. The scrutiny of John Healey’s Budget will be intense. He has to show he is pulling levers for growth, yet has so little wriggle room given current spending commitments. Higher taxes are likely to land, but if they risk curtailing investment, it could make the future balancing of the books even more difficult.’’