Susannah Streeter, Chief Investment Strategist, Wealth Club: ‘’The Footsie started on the front foot in early trade, but lost ground as worries about the repercussions of the energy crisis reverberate again. The Middle East remains mired in uncertainty, keeping crude costs elevated and piling pressure on companies and consumers around the world.
Unrest in Spain and France underlines the difficult position governments are facing as they try to alleviate living costs while providing the essential services demanded by citizens. Mass protests in Spain over housing costs have led to fresh political instability, with a snap election now called, after parliament rejected emergency measures designed to ease the crisis. High energy bills have added to the pressure on households, highlighting how the cost of the energy shock can quickly spill over into wider political and social tensions.
This appears to be overshadowing earlier optimism triggered by Friday’s softer US jobs report. It pointed to a tepid labour market, which could dampen inflationary pressures, given employees will have less bargaining power to demand higher wages, which can feed through into higher prices. Friday’s rally in US stocks initially acted like a rising tide, lifting the Nikkei and but European stocks aren’t benefiting from quite the same level of optimism. Although the US labour market snapshot helped bring government bond yields down slightly, but they remain highly elevated and big risks remain. Successive interest rate hikes are still being priced in, given there is no end in sight to the war with Iran which has sparked these inflationary fears. Brent crude has dipped back slightly but is still trading above $101 a barrel, more than 40% higher than before the conflict broke out. There’s a feeling that the situation could have been worse by now, but much will depend on the security of energy supplies from the Middle East. The situation is still tense, with Iran backed Houthis attacking dozens of sites owned by Saudi Arabia’s oil giant Aramco. Yemen has launched a major operation push back against the group, but its tentacles have spread far and wide across the region. The Strait of Hormuz remains a major flashpoint with the attack on another tanker on Sunday is keeping worries bubbling about the potential for further disruption to supplies, particularly if shipping companies become increasingly reluctant to risk sending vessels through the crucial chokepoint.
UK drivers have felt the squeeze over the weekend, with diesel prices at record levels., hitting £2 for an average litre but costing much more in more isolated or captive motorway spots. A typical 55-litre tank now costs around £110, almost £32 more than before the Iran crisis erupted, a highly painful hike for millions of motorists.
The coordinated release of emergency oil and refined fuel stocks by the G7 is helping to take some of the heat out of the market, as governments try to ease pressure on motorists, businesses and transport operators. While this could provide some relief, it is essentially buying time rather than fixing the underlying problem. The more fuel that is drawn from emergency reserves, the thinner the safety cushion becomes if supplies through the Strait of Hormuz are disrupted again.
Bets are still on that the Bank of England will have to raise interest rates three to four times over the next year to try to keep inflation under control and prevent a price spiral emerging. So while a softer US jobs report has been greeted with relief for now, the reprieve could prove fragile. If energy flows remain disrupted and oil prices stay elevated, the pressure on inflation, interest rates and government borrowing costs is set to build again.’’
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