Market report: Risks rise amid Israel-Iran conflict and UK inflation remains sticky
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Sentiment remains subdued as investors brace for the Iran-Israel conflict to intensify. Oil prices remain sharply higher on the week, as President Trump has called for Iran’s ‘unconditional surrender. It appears that regime change in Iran looks like the ultimate goal so it’s not surprising that vigilance is settling in. The FTSE 100 is set to trade flat and is set to struggle to make up Tuesday’s losses. Wall Street futures also indicate restrained activity, as a risk-off mood percolates.
Given that a quarter of global oil supplies flow through the narrow strait of Hormuz off the Iranian coast, there is increasing concern that a prolonged war will lead to a significant disruption of supplies. Brent Crude is trading above $76 a barrel, around 10% higher compared to when the attacks on Iran began, at levels not seen since February. Already it appears some ships are avoiding the region. There’s not an exodus yet, but companies are operating with extreme caution, and a closure of the strait would disrupt global supply chains.
Just as sticky inflation is already a concern the surge in energy prices and a potential ramp up in shipping costs is set to cause more trouble. It’s certainly an extra headache for policymakers deciding on interest rate cuts this week. Consumer Price Inflation hasn’t budged in the UK, coming in at 3.4% for May. This was expected and although this is a slightly better scenario than another ramp up in price increases, it’s unlikely to persuade more decision makers to vote for a rate cut tomorrow. Higher crude prices are set to lead to more expensive prices at the pumps, and potentially increased transport bills. Natural gas prices have also risen amid the geopolitical instability, given the potential disruption of LNG shipments from Qatar, which is the third largest global exporter. A long, drawn-out conflict could keep prices elevated, which would have a knock-on effect on electricity prices, increasing energy bills for consumers and companies later this year, just as they had hoped lower costs were here to stay. Nevertheless at least two more interest rate cuts are expected from the Bank of England this year, with the chances of a reduction in August bulking up a little.
The widening of conflict in the Middle East and unpredictability of trade policy means Fed policymakers are expected to keep the pause button firmly on hold later today when it comes to interest rates. This is despite the fact that the latest inflation reading came through softer than expected. Comments from Jerome Powell, the Fed chair will be closely watched for any indication of when a reduction will come. Wariness is set to remain the name of the game when it comes to monetary policy amid this escalation of conflict and erratic tariff threats. Markets are currently only fully pricing in a 0.25% rate cut by October, given the uncertainty of the current situation.”