Market Report: Oil surges, Trump’s strategy backfires and inflation fears return
Susannah Streeter, chief investment strategist, Wealth Club: “Stasis has taken over markets as investors wait for the latest twist in the Iran conflict and brace for higher energy prices to filter through to economies. Brent crude has surged even higher, topping $84 a barrel, while European gas prices have shot up to levels not seen in three months.
The Strait of Hormuz is once again a dangerous flashpoint and fast becoming a highly expensive one. For weeks, speculation has swirled about Iran imposing tolls, and now the US has jumped into the fray, demanding hefty payments from nations using the Strait. President Trump has called for a 20% reimbursement on cargoes transiting the waterway, although he did not specify whether this would be based on the value of the cargo, shipping costs or another measure, leaving big questions over how such a levy could be implemented. It could also lead to fresh political fractures between the US and its allies in the Gulf, given that their shipments look set to be targeted in return for the US helping to secure shipping lanes. Given that the Strait had been toll-free before the latest escalation, and that the current stand-off has been intensified by the recent exchange of strikes between the US and Iran, there’s likely to be growing frustration at this turn of events. For now, the UAE is directing its anger towards Iran, particularly after overnight attacks on tankers, but diplomatic fault lines could quickly emerge if Gulf nations are presented with a hefty bill for US protection, potentially souring relations with some of Washington’s closest regional allies.
Trump’s foreign policy looks increasingly counterproductive. Not only has the confrontation with Iran pushed up energy prices and threatened a vital shipping artery, but efforts to curb Beijing’s export machine also appear to be falling short. China’s trade surplus widened to $125.62bn in June from $105.43bn in May, making it among the largest monthly surpluses on record. Exports have revved up another gear, surging 27% from a year earlier as strong demand for technology products, alongside a rush to beat looming tariff deadlines, helped power shipments. It also underlines how China has forged stronger trading relationships with countries around the world, helping to cushion the impact of Washington’s trade offensive. Imports also surged, suggesting efforts by Beijing to stimulate domestic demand are beginning to bear fruit, with consumer subsidies, easier monetary policy and increased infrastructure spending helping to lift activity.
Inflationary pressures are beginning to build again, with oil and gas prices shooting higher just as investors prepare for the latest snapshot of US consumer prices. Unease is also showing up in bond markets, with the yield on the benchmark US 10-year Treasury hovering around 4.62%, close to two-month highs. In today’s CPI snapshot, headline inflation is expected to ease to around 3.8%, reflecting lower gasoline prices during much of June, but the key metric for policymakers will be core inflation, which is expected to remain sticky at around 2.9% year-on-year. With oil prices surging again following the renewed conflict in the Strait of Hormuz, investors will be looking beyond today’s data to gauge how quickly higher energy costs could feed through into inflation in the months ahead. A softer-than-expected reading could revive hopes for lower borrowing costs and lift equity markets, while a hotter print would likely send Treasury yields and the dollar higher, piling fresh pressure on stocks.
Back in Westminster, Andy Burnham’s path to Number 10 has been smoothed after he picked up another 27 Labour MP nominations overnight, taking his tally to 349 and effectively ending any prospect of a leadership contest. He’s pledged to stick to Labour’s fiscal rules while maintaining support for business investment, a balancing act likely to reassure bond markets but one which leaves little room for expensive policy giveaways. One thing is certain – he’ll inherit an overflowing in-tray. Pressure is already mounting from business groups for a more ambitious growth agenda, with the CBI among those urging swift action to reduce industrial electricity costs, arguing that Britain’s high energy prices are undermining competitiveness and deterring investment. Balancing fiscal discipline with mounting demands to kick-start growth could prove one of Burnham’s first, and toughest, challenges in Downing Street.”