Weekly Investment Commentary: Bridge Over Troubled Waters

Weekly economic update from Rupert Thompson, IBOSS Chief Economist, part of Mattioli Woods, where he analyses market reactions to recent events and identifies upcoming market trends in global markets, including in equities, fixed income, FX, etc.

In today’s piece, Rupert looks at:

• US-Iran war: Markets differed from recent weeks, cheered by early suggestions that a ceasefire deal might be possible and that the war could be brought to an early end. However, as has been the case from the start, prospects for an early resolution shifted almost by the day. We begin this week with the two sides seemingly still far apart, with Trump threatening to take Iran back to the stone age unless the Strait of Hormuz is opened by 8pm this evening, US Eastern time.
• What happens now: This remains far from clear, given the ever‑changing narrative from the US and Trump’s propensity to announce deadlines and then extend them. But markets are rather less concerned than they were ten days ago.
• Equities: Since Friday 27 March, global equities have gained 3.7% in sterling terms, reducing their loss since the war started to 3.7%. The US, UK and Europe led last week’s increases, with all three regions up around 4.5%. Japan and Asia, which are most exposed to potential disruption in oil supplies, were up a more modest 1.5% and 0.7% respectively.
• Bonds: Bonds recovered somewhat last week, with UK gilts and US Treasuries up 1.2% and 0.6%, reducing their war‑related losses to 3.0% and 1.5% respectively. Fears that a forthcoming rise in inflation would trigger several UK rate hikes were eased following comments from BoE Governor Bailey that markets had got ahead of themselves. Even so, markets continue to price in two rate hikes later this year. Fed Chair Powell also eased concerns about US rate increases, stating that the Fed was in a good position to wait and see how events in the Middle East unfold. Markets appear to believe him and expect US rates to remain unchanged for the rest of the year.
• Oil: The lynch pin in all this – had another rollercoaster week. Oil continues to be driven first and foremost by developments around a ceasefire and the potential reopening of the Strait of Hormuz. At the margin, however, there was positive news that Iran is now allowing Iraqi tankers to pass through the Strait, potentially restoring 3mbd of the 20mbd of supply halted by its closure.
• In the US: Last week brought reassuring news on the health of the US economy, with March payrolls posting their largest gain in 15 months. While recent data has been volatile, the figures reinforce the picture of a stable rather than deteriorating labour market.
• This coming week: The next 12 hours will be crucial in determining which of the two scenarios discussed in last week’s commentary we are heading toward. Macro releases will remain very much of second‑order importance for markets. That said, US March inflation data on Thursday will still attract some attention, with the surge in oil prices expected to push headline inflation up from 2.4% to 3.3%.

Bridge Over Troubled Waters

Markets last week were once again dominated by the war with Iran. The difference from recent weeks was that they cheered up, buoyed early on by suggestions from both sides that a ceasefire deal might be possible and the war brought to an early end.

However, as has been the case right from the start, the prospects for an early end to the war changed almost by the day. And we start this week with the two sides seemingly still far away from a deal and Trump threatening to destroy Iran’s bridges and power plants – and take Iran back to the stone ages – if Iran has not re-opened the Strait of Hormuz by 8pm this evening US Eastern Time.

What happens now – to state the obvious – remains far from clear given the ever-changing narrative coming out of the US and Trump’s propensity to announce deadlines and then extend them. But markets are rather less concerned than they were ten days ago.

Since Friday 27 March, global equities have gained 3.7% in sterling term, reducing their loss since the war started to 3.7%. The US, UK and Europe led last week’s increases with all three regions up around 4.5%. Japan and Asia, which is most exposed to the disruption in oil supplies, were up a more modest 1.5% and 0.7% respectively.

Bonds also recovered somewhat last week with UK gilts and US Treasuries up 1.2% and 0.6%, reducing their war-related losses to 3.0% and 1.5% respectively. Fears that the forthcoming rise in inflation will trigger several rate hikes here in the UK were eased following comments from BOE governor Bailey that the markets had got ahead of themselves on this front. Even so, the market continues to price in two rate hikes later this year.

Fed Chair Powell also eased concerns that US rates could be increased, stating that the Fed was in a good place to wait and see how events in the Middle East turn out. The market believes him and expects US rates to be kept unchanged over the remainder of the year.

Meanwhile, oil – the lynch pin in all this – had another rollercoaster week. The Brent crude price dipped to $100 per barrel at one point but is back now close to $110 where it started the week.

Oil is being driven first and foremost by the state of play regarding a ceasefire and potential reopening of the Strait of Hormuz. But at the margin, there was the positive news that Iran is now allowing Iraqi tankers to pass through the Strait, potentially restoring 3mbd of the 20mbd supply halted by its closure. Furthermore, Saudi Arabia has re-routed to a pipeline to the Red Sea around two thirds of the 5mbd or so of its oil exports previously transported through the Strait.

Last week also saw comforting news on the health of the US economy. Payrolls in March unexpectedly posted their largest gain in 15 months. While recent data have been very volatile and too much should not be read into this increase, the numbers do reinforce the picture of a stable rather than deteriorating labour market. Manufacturing confidence also withstood the surge in oil prices, improving slightly last month.

This coming week, particularly the next 12 hours, will be crucial in determining which of the two scenarios outlined in last week’s commentary we are headed down. Macro releases will remain very much of second order importance for the markets. That said, US inflation data for March on Thursday will still garner some attention with the surge in oil prices expected to lead to headline inflation jumping from 2.4% to 3.3%.