Last week’s focus remained on the developing situation in the Middle East. Since the conflict began on 28th February, markets have become increasingly sensitive to the resulting energy shock. The Strait of Hormuz remains largely closed, meaning flows through a passage that usually handles about onefifth of global oil and gas supply have effectively been halted. Oil prices have been extremely volatile, rising to almost $120 a barrel and suffering one of the largest single-day moves on record last Monday. Some supply-side pressure was alleviated during last week when the International Energy Agency said it would release 400 million barrels of oil from emergency reserves held by its 32 members. This move significantly eclipses the 182.7 million barrels that were released following the Russian invasion of Ukraine in 2022, highlighting the severity of the challenge the global economy is currently facing.
JPMorgan have marked down the value of some loans in their private credit portfolios, limiting the amount of money the bank will lend out to private credit firms. The loans, which are rumoured to be heavily tied to software companies, have come under the spotlight in recent weeks due to investor concerns surrounding future AI profitability. Equity markets remain cautious of software companies, with the sector one of the worst performers so far this year.
US Equity Market:
Shares in software company Oracle surged over 10% last Tuesday following impressive earnings figures. The company also increased its guidance on future revenues, reassuring investors that its bet on trying to compete with the likes of Amazon and Microsoft to supply computing power is paying off.
The US unexpectedly shed 92,000 jobs in February, according to a report released by the Bureau of Labor Statistics recently. The figure came in well below the 58,000 gain that was expected by analysts, and was accompanied by a downward revision to December’s and January’s figures, and an uptick in the unemployment rate. This complicates matters for the Federal Reserve, as they battle two opposing forces; weak labour data calls for interest rate cuts, whilst rising inflation calls for interest rate hikes. With the uncertainty around future inflation rising due to the conflict in the Middle East, the situation is far from easy to navigate for rate setters.
UK Equity Market:
It has been a challenging period for the FTSE 100 since hitting its record high of over 10,900 at the end of February. The index now sits more than 5% down from that peak, with the decline primarily attributable to the fallout from the ongoing conflict. The market opened with a sharp drop last Monday but largely rebounded over the course of the week. Legal & General dragged on last Wednesday’s performance, after reporting a solvency ratio below expectations, and in spite of announcing a record £1.2 billion share repurchase programme, while energy majors BP and Shell have been relative bright spots, benefiting from elevated crude prices.
The outlook for UK house prices also deteriorated sharply over February, with the rise in oil and gas prices triggering inflation and ‘higher for longer’ mortgage rate concerns, according to a survey of estate agents by the Royal Institution of Chartered Surveyors. Elsewhere, Blackstone revived plans to sell its Canary Wharf office, seeking a price tag in excess of £250 million – a move signalling greater confidence for the area following several post-Covid years of office selling difficulty.
Inflation, Interest Rates and Bond Markets:
US inflation held steady at 2.4% in February, as did core inflation, which strips out energy and food prices, at 2.5%. These releases both fell in line with expectations, but it is worth noting they cover the period just prior to the Iran-war-related energy-price surge, which is expected to be reflected in March data. The 10-year Treasury yield started last week with a jump above 4.2% among the renewed oil-driven inflationary pressures, stabilising somewhat midweek, before climbing back above the 4.2% level into Thursday. Attention now turns to this week’s Federal Reserve meeting, where the central bank is expected to hold interest rates in the current 3.5-3.75% range, as traders bet on policy makers taking a ‘wait and see’ approach.
Expectations for the Bank of England have shifted more significantly, with markets now pricing in an approximate 70% chance that the benchmark rate will actually increase by 25 basis points by the end of the year, up from 3.75%. Similarly to the Fed, it is expected that rates will be held in this week’s meeting, as the Monetary Policy Committee assess the longer-term implications of the war in the Middle East. Meanwhile, China announced last Monday that inflation had hit a 37-month high, at 1.3% in February, but it is not expected that this will inhibit ongoing monetary easing by the People’s Bank of China.
What’s on the horizon
Markets will continue to monitor the developments in the Middle East, with the broader geopolitical trajectory, and particularly the direction of oil prices, remaining key topics of focus.
It’s a busy week ahead for central banks. The Federal Reserve’s Open Market Committee will meet on Tuesday and Wednesday, with the policy announcement due on the latter, before the Bank of England’s Monetary Policy Committee follow with their rate decision on Thursday. Additionally, Canada will announce inflation figures today, followed by an interest rate decision on Wednesday. The Bank of Japan and European Central Bank are then due to round off the week with their own interest rate decisions on Thursday
The Cambridge Team
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Source of financial market data: MorningstarDirect.