Susannah Streeter, Chief Investment Strategist, Wealth Club: “Some calm has descended on markets after a brutal week, but fears remain elevated about how economies will respond to an inflation shock sparked by rampant energy prices. A high degree of caution is set to dominate sentiment at the end of the week, as the trajectory of the conflict with Iran remains highly uncertain.
Worries that interest rates may have to be increased sharply to contain a new price spiral have sent the cost of financing UK government debt sharply higher. This makes the latest snapshot of the public finances uncomfortable reading. Borrowing came in at £14.3 billion in February, £2.2 billion more than last year, marking the second-highest level for the month since records began. This was partly due to the timing of debt interest payments and demonstrates how onerous the borrowing burden already is for the government, just as it faces even higher costs to refinance its debt.
Although the Chancellor, Rachel Reeves has previously said there is room for some financial support to help alleviate high energy costs for businesses and consumers, she is highly constrained. The longer the conflict continues, the less fiscal firepower the government will have to provide meaningful stimulus to an economy that was already stagnating before the conflict escalated.
Crude prices may have fallen back slightly but remain highly volatile. They have dropped from the worrying highs reached yesterday but remain well above $100 per barrel, with Brent crude currently trading at around $108 a barrel. Gas futures have also retreated but remain more than 10% higher than before attacks intensified on energy facilities in the Middle East this week.
Traders are still assessing the cost of the damage inflicted on Qatar's Ras Laffan complex, which is responsible for around a fifth of global LNG supplies. The damage could take years to repair, which is why these sharply higher prices may persist. There have been efforts to calm markets, with Israel vowing not to resume attacks on Iran’s energy infrastructure. There have also been claims of significant progress, with Benjamin Netanyahu stating the conflict could end ‘a lot faster than people think’.
However, the US administration is clearly rattled by rising energy prices, particularly if elevated gasoline costs become entrenched and hurt Republican electoral prospects. Treasury Secretary Scott Bessent has suggested that sanctions on Iranian oil could potentially be lifted. This appears to be a desperate measure to contain prices, given that US forces are still engaged militarily against Iran. Similar relief has already been granted to Russia via a one-month waiver allowing its oil on tankers at sea to be purchased.
Lifting sanctions may provide only limited relief to elevated prices but could enable these regimes to continue funding their war efforts.”
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