Markets continued to monitor for developments surrounding the Middle East conflict last week, with the US President starting the period suggesting that Israel and Iranian-backed armed group, Hezbollah, had reached a ceasefire agreement. This followed US-Iranian peace talks seemingly stalling in response to Israel’s offensive in Lebanon. Despite news breaking that Israel and Lebanon had agreed to a ceasefire last Thursday; Hezbollah later rejected the proposal.
The price of brent crude oil had a bumpy week in response to geopolitical developments – it started last week around the $90 per barrel level, climbing above $98 briefly on Wednesday, before settling back at around $95 on Thursday. Notably, US data published midweek showed total stockpiles of crude and petroleum products have fallen to 1.57 billion barrels – their lowest level since 2004. This decline prompted industry analysts to warn that oil prices could move sharply higher again in the coming weeks. Gulf oil producers including Kuwait, Saudi Arabia and the United Arab Emirates, have begun seeking alternative methods to export their oil following over three months of disrupted transport via the Strait of Hormuz. While projects such as running a west-east pipeline to bypass the Strait have been discussed in the past without materialising, the ongoing conflict in the region may prove to be the ultimate business case for its construction.
US Equity Market:
Mega initial public offerings (“IPOs”) continue to be the hot topic on Wall Street. Anthropic, the company behind Claude, announced last week that it had confidentially submitted the required paperwork to the US securities regulator for its public market debut. While a share price target for its listing has not yet been provided, investors anticipate the company will value well above the $1 trillion mark. AI rival, OpenAI, which was recently privately valued at $825 billion, is said to also be planning to go public imminently in this race for investor capital. This all follows Elon Musk’s SpaceX last month submitting its own IPO prospectus. Further details arrived last week revealing that SpaceX intends to sell around 555 million shares at $135, raising $75 billion in total – which would make it the largest IPO in history. This only reflects around 4% of the total shares in the company, however, meaning the whole corporation would have a market value of $1.78 trillion should things go to plan.
Last week saw Berkshire Hathaway announce an $8.5 billion agreement to purchase US homebuilder, Taylor Morrison, in their first major acquisition since Warren Buffet’s retirement. Upon the announcement, Taylor Morrison shares surged 22% last Monday. Analysts suggest that the deal indicates a bet on the recovery of the US property sector – a sector which has shown some signs of growing momentum despite higher mortgage rates, with single-family home construction expected to increase by 5% next year. Off the back of the deal, there is growing optimism that the $1 trillion investment company may finally begin deploying its near $400 billion war chest of cash and short-term US treasuries, that it has been sitting on for some time.
Despite promising news over last week, the S&P 500 and Nasdaq indices closed the week to Friday down 2.55% and 4.5% respectively, as developments in the Middle East weighed on performance and strong US jobs numbers (released on Friday) further diminished the prospect of US interest rate cuts.
UK Equity Market:
Politics dominated UK headlines, as Keir Starmer challenged Elon Musk on his attempts to induce UK political division. This followed the Tech billionaire posting 110 times to his social media platform, X, about British politics last week. Amidst this, was news of a falling number of wealthy individuals planning on shifting their jurisdiction away from the UK, as the effects of the abolition of the non-domicile tax regime has mostly played out.
Nationwide’s house price index showed last week that UK house prices fell 0.6% over May, as the impact of the Iranian conflict drove mortgage rates higher, and house prices lower. This datapoint conflicted with news that UK construction activity slowed at its sharpest pace in six years in May, something that would typically put upwards pressure on house prices. Elsewhere, the UK government confirmed a £1.3 billion funding injection to support the development of a new Universal Studios theme park in Bedfordshire. The project is expected to create thousands of new jobs, to the government’s relief, following data last week that online adverts for UK starter jobs have halved over the past decade.
In the stock market, UK banks and insurers with large exposures to China fell off the back of reports that mainland residents face tightening constraints when trying to open offshore investment accounts in Hong Kong. This sent HSBC, Standard Chartered and Prudential down 4.8%, 6.4% and 6.7% respectively. The FTSE 100 index finished the week to Friday down 0.37% and sterling trades slightly lower at around 1.33 against the US Dollar.
Inflation, Interest Rates and Bond Markets:
Despite conflict-driven inflation pressures over the course of the beginning of the year, the FT reported last week that the ongoing shock to global markets appears to be less severe than the one caused by Russia’s invasion of Ukraine in 2022. The conclusions, driven by analysis from Consensus Economics, highlight that downward revisions of growth forecasts, and upward revisions of inflation, have been much less significant than those projected 3-months after the 2022 crisis. For example, projections for inflation have on average increased by 80bps, whereas Russia’s invasion of Ukraine triggered upward revisions of 230bps.
What’s on the horizon
As has been the theme since February, the major focus for global investors will be developments in the Middle East and whether the Israel-Lebanon ceasefire will materialise.
There will be a host of macroeconomic data releases this week. Japan will kick things off by reporting their first quarter GDP at the start of the period. In the US, the CPI print for May will be released on Wednesday, followed by jobless claims data on Thursday. These are key datapoints that could shape investor expectations for Federal Reserve monetary policy in the near term. The UK will round the week off by releasing first quarter GDP data.
In monetary policy, both the Bank of Canada and the European Central Bank will make their next rate decision this week. On the earnings front, technology companies Oracle and Adobe will be among those reporting
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Source of financial market data: MorningstarDirect.