Market report: Iran deal sparks relief wave amid hopes of inflationary pressures easing
Susannah Streeter, chief investment strategist, Wealth Club: ”Investors are buzzing with relief given a longer-term solution to the Middle East crisis seems to have been clinched which should ease the energy crunch.
After months of dashed hopes, a more secure deal appears to have been struck between the US, Iran and Israel, which should enable oil, gas and other vital supplies to flow freely through the Strait of Hormuz. Stocks in Asia surged higher, and European markets are poised for a bounce, as companies finally eye respite from soaring costs.
Brent crude which has been a gauge of tensions has fallen back sharply to trade at $83 a barrel. UK gas prices have also dropped sharply, down 6%. With energy prices falling back, inflationary pressures should start to ease off. However, prices are still elevated, with crude some 16% higher compared to just before the war broke out and gas prices still more than 30% higher. It’s partly because some nervousness remains given that we’ve had plenty of false starts to this peace process. It also reflects the expected slower start to the resumption of energy flows, given the damage wreaked to facilities across the Gulf region which will take many months to repair.
Nevertheless, there is an expectation that inflation won’t now be quite so onerous for economies, and so there’s a reassessment going on about where interest rates could end up. Worries about multiple rate hikes this year from the Bank of England look set to recede. Numerous policymakers have indicated they are inclined to take a wait-and-see stance so it’s highly likely there will be no change when they meet on Thursday. With the UK economy contracting in April and consumers and firms nervous about spending and investing, decision makers will be weighing up the risks of higher inflation against a struggling business backdrop.
The Fed is expected to stay on the fence for the foreseeable future, with central bankers also expected to announce no change to the funds rate on Wednesday. This stance is set to continue to support stocks, given the tech heavy nature of US indices, with valuations set on future earnings expectations, which are influenced by interest rates.
The S&P 500 and the Nasdaq are set for another pulse higher amid this sharp easing of geopolitical tensions, adding to the fresh momentum sparked by the SpaceX debut. The huge enthusiasm for Elon Musk’s vision for space exploration and domination shows little sign of, for now, abating, despite the risks ahead.’’