Market report: Risk-on attitude rebounds amid Iran deal hopes despite UK economic contraction
Susannah Streeter, chief investment strategist, Wealth Club: “Risk-taking is back in fashion at the end of another volatile week, helped by renewed confidence that the conflict with Iran may soon end. president Trump’s promises are again moving markets, with investors buoyed by his assertion that a deal could be reached as soon as this weekend. The hotly anticipated SpaceX IPO is feeding the frenzy, with high hopes that aerospace and AI will cross bountiful new frontiers in the future.
The FTSE 100 has joined the party of optimism and gained ground, despite the latest snapshot of the UK economy showing it went into reverse in April. Activity shrank by 0.1% with a contraction in the services sector weighing on overall output. Consumers were clearly unnerved by fears about higher bills, disruption to holidays and more expensive loans, and reined in spending. However, there were glimmers of progress – construction grew marginally and the overall economy gained 0.7% on a three-month basis. A contraction had been expected, and there will be some relief that the damage to the economy has not been deeper although worries will remain that the UK remains mired in stagnation.
There are now hopes that if a longer-term resolution over Iran is reached, global growth prospects will improve which is supporting the internationally focused FTSE 100. Amid expectations that negotiations will bear fruit, oil prices have scuttled down, with Brent trading around $88 a barrel. This should help ease some inflationary worries but even at this level, prices are still around 23% higher than they were before the war broke out. Even if warring nations sign on the dotted line, the Strait of Hormuz still risks becoming a future flash point. Given the damage wreaked on facilities it’s going to take months, if not years for energy supplies in the region to return to pre-conflict flows.
Nevertheless, with the world having drifted from an acute crisis to a less dangerous phase in the energy crunch, fears are retreating and safe haven plays are suffering. Gold has retreated further, hovering around six-month lows as geopolitical tensions tease off. The stronger dollar is also playing into its decline, given interest rate hikes are on the cards for the Fed, and investors are switching from storing value in precious metals to seeking returns elsewhere.
In the US tech stocks have rebounded, particularly semiconductor companies, after the sell-off. However, the S&P 500 looks set for a flat start to trading, and the Nasdaq futures are also teetering into the red, as the SpaceX IPO, the largest initial public offering in history, looms large.
Elon Musk likes to make a splash in everything he does, but he may not soak the markets in rocket fuel this time around, with more scepticism surfacing about the reality of his long-term ambitions. Retail investors who will make up a 30% of buyers are buying into his big dreams of space domination despite the risks surrounding his vision. The offer is reportedly at least four times over-subscribed and there will be plenty of disappointed investors today who were hoping to unwrap an allocation at the offer price of $135. To get a slice of the action they’re likely to join in a bunfight for shares when they start trading. Initially the price will be driven by hype, and scarcity rather than anything fundamental. A lot of expected future success has already been priced in and you would have to be a very optimistic investor to expect the share price to keep rising significantly.
New investors won’t be buying today’s business, but assumptions about tomorrow’s world and how it will pan out. SpaceX’s ambitions are stratospheric and potentially transformative, but they are also highly capital-intensive and dependent on technological breakthroughs and regulatory approvals. Investors will need to balance the excitement of Musk’s vision against the realities of operating in this risky new frontier.
One threat that isn’t being paid much attention to is the potential for geopolitical tensions to spill into the space domain. Space-based infrastructure like satellites could become increasingly vulnerable and we could see degradation of critical satellite networks through cyber-attacks, jamming attempts or even direct anti-satellite military action.
The coming weeks and months are likely to see volatility hit the stock, which often happens post-listing – and is highly likely given the mega valuation. Given the turbulence expected and concerns about the risks that could be ahead for Elon Musk’s ambitions in the space domain, investors should only moonwalk into this opportunity with high caution and a well-diversified portfolio.’”