Middle East tensions remains the main market driver with stalled peace efforts between the US and Iran keeping oil prices and risk sentiment sensitive to headlines. Brent crude rose nearly 3% before easing back down as concerns grew around the continued disruption to the Strait of Hormuz. Volatility in the markets remains elevated as it continues to react to developments in the conflict.
In the UK, Labour suffered from poor performance in the local elections, and continued speculation around Keir Starmer’s leadership pushed long-dated gilt yields higher, with Reuters reporting that 20- and 30-year gilt yields moved close to their highest levels since 1998. Investors focused on fiscal credibility and political stability, and gilt yields (temporarily) eased last Thursday when it became clear a leadership challenge was not immediately imminent, following the announcement of the health secretary’s resignation.
US Equity Market:
US 30-year treasury bonds sold at a yield of over 5% for the first time since 2007, and April’s US CPI showed consumer pricing rose by 0.6% on the month and 3.8% on the year, which Reuters reported was the largest annual increase since March 2022. This reinforced concerns that sticky inflation may delay future Federal Reserve rate cuts, with the inflation figures mainly driven by the higher energy costs resulting from rising oil prices because of the middle east conflict.
On the topic of the Federal Reserve, Kevin Warsh was confirmed as the Fed chair following a senate vote, and Reuters reported that markets now expect no change to the Fed’s 3.5-3.75% policy rate target this year, with a rate hike possible as soon as January.
Separately, the US announced retail sales had increased 0.5% month-on-month and 4.9% year-on-year in April despite inflationary pressures, matching market expectations.
The S&P500 closed marginally up for the week to Friday. The Nasdaq index closed the week to Friday marginally down.
UK Equity Market:
The Office for National Statistics (ONS) reported stronger-than-expected GDP growth for March and the first quarter, at 0.3% and 0.6% respectively, which gave markets a better read on domestic resilience. However, economists have warned that the Iran war, increasing energy costs and weaker consumer demand could sharply slow growth later this year.
Looking at policy, the Bank of England announced its intention to water down its planned restrictions on stablecoins in the face of pressure from the digital assets industry last Thursday, with officials keen to “create a regime where stablecoins can succeed” and deliver benefits to user.
The FTSE 100 closed marginally down over the week to Friday.
Inflation, Interest Rates and Bond Markets:
China CPI remained relatively subdued at a 1.2% increase year-on-year, reflecting weak food price dynamics and softer domestic demand, as per China data live. However, the producer price index increased 2.8% year-on-year, the highest since July 2022 as per CNBC. The Middle East conflict has impacted China’s crude imports, falling 20% in April compared to a year earlier. On the topic of oil, the President of China expressed interest in purchasing more U.S. oil to wean off reliance on Middle Eastern exports in the US-China summit in Beijing last week.
There were no major central bank interest rate decisions last week, and corporate bond spreads in the US and UK held at their current levels despite the hotter-than-expected inflation data and geopolitical headlines.
What’s on the horizon
The near-term focus for investors will continue to be developments in the conflict in the Middle East, which continue to affect oil prices and bonds, with eyes firmly on whether a progress is made towards a ceasefire at the talks between Lebanon and Israel in Washington DC.
Earnings season continues to roll on this week with Q1 earning announcements for Nvidia, RyanAir, Home Depot, Coca-Cola, Walmart, MUFG and Deere and Company to name a few.
UK investors will continue to watch the political developments too, following on from the fallout of the local election results and cabinet activity.
Aside from these points, there will be macroeconomic points to be aware of. The UK’s CPI and PPI inflation print and retail sales data from ONS will be on the radar, and the US Federal Reserve’s meeting minutes will be released just before the weekly unemployment claims are published. In the Eurozone, the final CPI inflation print is due to come out, and China will announce its latest decision on whether it is cutting borrowing rates or not.
This material has been written on behalf of Cambridge Investments Ltd and is for information purposes only and must not be considered as financial advice. We always recommend you seek financial advice before making any financial decision.
Past performance is not a guide to future performance.
The value of your investments can go down as well as up and you may get back less than you originally invested.
Source of financial market data: MorningstarDirect.