Market report: Investors stay defensive and energy prices remain elevated amid conflict
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “As risk-off sentiment has been spreading, investors have been seeking more defensive positions amid fears of conflict escalating in the Middle East. The FTSE 100 looks set to benefit from higher energy prices with oil and gas prices dipping back but remaining at elevated levels, having jumped sharply over supply concerns. Investors are braced for volatility ahead amid fears that Hezbollah militants could attack Israel over its operations in Gaza as forces ready for invasion. US Secretary of State Antony Blinken has been on a whistle stop tour of countries around the Middle East, stressing that all leaders want to see the conflict contained, but there is clearly still concern about the risks of contagion. Although gold prices have dipped back a little, they remain a near month-long highs demonstrating the desire for safe haven assets. The Israeli prime minister’s vow to demolish Hamas is also helping keep the dollar strong, as investors desert riskier positions.
Whatever the short-term outcomes, concerns are spreading about fresh geo-political fracture and deglobalisation effects which could act as a drag on growth over the longer-term, particularly with the war in Ukraine ongoing, and concerns about the US/China relationship still bubbling. Warnings from JP Morgan Chase CEO, Jamie Dimon, that the world may be facing the most dangerous time in decades overshadowed the bank’s buoyant earnings report on Friday. Other big US banks, Goldman Sachs, Bank of American and Morgan Stanley will report this week, and they are also expected to show they are profiting from interest rate windfalls. However, the uncertain winds blowing about the health of the global economy and the devastating scenes of fresh violence in the Middle East, are set to weigh more heavily on consumer and company sentiment.
With inflation showing fresh signs of stubbornness in the US, and the Bank of England’s chief economist warning that restrictive policy will be needed for some time, the recent spike in energy price is highly unwelcome. There will be concerns that higher oil and gas prices will it harder for central banks to bring down inflation. Prices have been sensitive to the shutting down of production at the Tamar natural gas field in Northern Israel due to the violence, but also worries about damage to the Baltic connector offshore gas pipeline between Finland and Estonia. UK gas prices are still hanging around levels not seen since mid-February, and with electricity costs linked to these wholesale prices, it could keep bills more elevated, just as we head into the colder months.
Sentiment is waxing and waning about just how tight the vice-like hold on interest rates in the US will continue to be. Comments from the Philadelphia Federal Reserve President, Patrick Harker have reignited hopes that the central bank might keep the pause button pressed on further rate hikes, but sentiment could turn on a dime again, if more hawkish views emerge this week.’’
