Susannah Streeter, Chief Investment Strategist, Wealth Club:“Inflationary worries are back front and centre at the start of the week as energy costs surge higher again after President Trump dashed hopes for immediate progress in talks aimed at breaking the deadlock in the Iran crisis.
Brent Crude has surged above $107 a barrel, and government borrowing costs have been on the rise again. Investors are bracing for interest rate hikes, with central bankers expected to move to stop the price spiral from becoming embedded. The worry is that the longer oil and gas prices stay elevated, the greater the chance that they will be passed on to consumers via higher costs of goods and services. Nevertheless, the FTSE 100 looks set to be lightly on the front foot in early trade, with the increase in crude prices set to support energy giants listed on the blue chip index.
It seems it's back to the drawing board again for talks after the US President turned down Iran’s latest terms for reopening the Strait of Hormuz more fully. There are talks planned for later this week, but it seems that these negotiations are set to be long and drawn out, with hopes for a resolution before the US mid-term elections fading fast. It comes as attacks by Houthi rebels have intensified in the region, with Saudi Arabia intercepting drones heading towards Riyadh, and other regions in the Kingdom also on high alert. Given that the Houthi rebel forces are backed by Iran, but also operate independently, the risk is that the conflict is becoming harder to contain. The threat of further disruption to energy supplies and shipping routes is hanging over the region and is keeping upward pressure on oil prices and adding to inflationary pressures.
It’s against this ominous backdrop that UK Chancellor John Healey is making his big speech at the Labour Party conference. While the UK’s precarious fiscal position has been built up over years of governments running deficits and taking on more debt, it’s also partly been in reaction to big global crises, like the pandemic, while the war in Ukraine and now the conflict with Iran have exacerbated cost-of-living pressures. Before the latest Middle East crisis intensified, inflation looked set to be heading on a bumpy downward path, but this chronic flare-up in tensions, causing a chronic energy crunch, is now threatening to keep inflation higher for longer. It’s making the Chancellor’s task of supporting households while keeping the public finances under control even more difficult. He will also be acutely aware of the heightened military threats the UK faces, given his former position as Defence Secretary – a role he resigned from in protest at the settlement agreed for the Defence Spending Plan. Now, given the suspected terror plot on RAF Fairford at the weekend, the need to better protect military bases around the world is coming into sharp focus, and this will be yet another urgent spending commitment he’ll have to weigh up. Bond investors are increasingly sceptical about the UK government’s tax and spend policies, especially in this highly fraught geopolitical environment. Borrowing costs have been on the march higher again, with 10-year gilt yields above 5.3%. The Prime Minister may have attempted to project a future of hope for the nation, but it’s likely that Healey will also inject a big dose of realism about how constrained spending will be, to try and keep bond investors onside and avoid more intense sell-off on bond markets.”
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