Market report: Gold reaches new highs and oil edges up on geopolitical uncertainty
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The defensive nature of the FTSE 100 has come to the fore, with the index rising in early trade amid fresh uncertainty in the Middle East. Oil and gold have been rising in tandem, following the confirmation of the death of Iran’s President, and the health of King Salman of Saudi Arabia, being the subject of speculation. Mining stocks and energy giants are on the front foot in early trade, while shares in defence contractors have also edged up.
Nervousness about the direction of geopolitics has pushed gold to fresh record highs, reaching $2,438 per ounce. Demand for the safe-haven asset has surged as investors have been digesting news of the death of Iran’s President Ebrahim Raisi who is believed to have been killed with others including foreign minister Hossein Amir-Abdollahian in a helicopter crash. Demand for the metal has also likely to have been pushed up by renewed speculation that the Federal Reserve will be minded to cut interest rates a couple of times this year. Recent data is indicating inflation is staying on the right downwards trajectory, and there are other signs of demand being drawn out of the economy, such as retail sales coming in softer. The dollar has edged a little lower, which makes gold slightly cheaper for overseas buyers, and a lower rate environment also reduces the profitability of investing in Treasuries, US government bonds, increasing the allure of gold as the opportunity cost of holding it falls. China has been bulk buying gold as well, which has helped support the higher prices, a trend which doesn’t look set to wane any time soon.
Brent Crude prices have been edging up amid the fresh geopolitical uncertainty prompted by the reported deaths of key figures in the Iranian regime, while there are also concerns about the health of King Salman of Saudi Arabia. His son, Crown Prince Mohammed bin Salman, has postponed a visit to Japan, due to his 89-year-old father’s illness, reported to be a lung condition. However, the moves are relatively muted, as traders have an eye on the next OPEC meeting due to begin on 1 June, where members will decide on future production quotas. If an increase isn’t agreed, it could add fresh strength to oil prices. China’s stimulus measures, with authorities going on home buying sprees to shore up the property market, could also help support crude if these policies help stimulate more domestic confidence and shore up demand for energy in the wider economy.
Ryanair’s full-year profits have soared to record levels helped by an insatiable demand for flights among customers. Consumers have been ringfencing budgets to satisfy their wanderlust, but there are now signs many more are starting to baulk at higher prices. The airline carried 183.7 million passengers, an increase of 9% year on year, helping boost profits after tax by 34%. A desperation to get away, means people have put up with price increases, which rose on average by just over a fifth compared to last year. But the airline is now warning that it’s recently been harder to flog seats with pricing not coming in as strong as expected. With recessionary winds having whipped up around Europe and economies set to stay highly sluggish this year, a more cautious sentiment appears to be emerging among consumers. However, a bout of washout weather in key markets is likely to prompt spurts to seat buying for a spot in the sun, and Ryanair remains optimistic that peak summer demand will be strong. Further turbulence could also come given how exposed the airline is to troubles at Boeing, which have led to delays in new aircraft deliveries. This is set to cause a further headache for capacities and schedules heading into the busy summer period.
The CPI inflation data due out on Wednesday for the UK is expected to show inflation sharply slowed in April. But even if the longed for 2% target is reached, Bank of England policymakers have stressed that it will need confidence that inflation will consistently stay at or near the target before they start reducing borrowing costs.
They will be mindful that pay growth remains hot, with bonuses in March the highest on record. The concern is that hefty wage bills may be passed on in the form of higher prices for goods and services. Unemployment may have edged up, but inactivity rates have also shifted higher, with the numbers of long-term sick limiting the pools of available labour. This does make the Bank of England decision to cut rates harder, and they’ll want to see more data indicating an easing of pressures, which is why an August rate cut is still, on balance, looking more likely.’’
