Susannah Streeter, Chief Investment Strategist, Wealth Club: “The flash of fear which shook financial markets at the start of the week is fading after President Trump claimed the war with Iran was nearing the end. His comments helped push oil prices down further from scorching levels, with benchmark Brent Crude now hovering around $90 a barrel. Prices had already slipped after G7 finance ministers pledged to stand by and release emergency crude, if needed, to calm volatile markets. A relief rally is now taking hold as hopes lift that an end to the conflict could be in sight.
But given that the fighting is continuing and the key Strait of Hormuz remains impassable, worry is still percolating. Oil prices remain more than 25% higher than before the conflict began. Trump has pledged that the US Navy will provide a guard for tankers through the Strait, but any timeline for that is highly obscured, with forces for now focused on taking out military infrastructure rather than becoming ship escorts.
Until a longer-term resolution is found, companies and consumers are still set to pay the price for the attack by the US and Israel on Iran. The repercussions for an array of everyday costs affecting companies and households are becoming clear. Prices at the pumps have already increased, and motorists are being warned to drive more conservatively to offset an expected further rise in costs. More generous fixed-rate energy tariffs have been scrapped, and households are bracing for a rise in the energy price cap in July. Borrowing costs are set to stay elevated for longer due to the inflation pressures higher energy costs will bring, and better mortgage deals have been withdrawn.
Nevertheless, a balm has been put on the worst of the fears amid hopes there could be a faster resolution to the conflict. Concerns that a severe inflationary shock could occur - which could see interest rates rise later this year - have abated. Even so, policymakers at the Bank of England are set to stay in wait-and-see mode and keep rates on hold for many months until the full repercussions for consumer prices become clear. Decision-makers at the US Federal Reserve are also set to remain highly cautious as they try to work out whether the bigger worry should be inflation or sharply slowing growth, with the February jobs data already indicating nervousness among employers. The shock of war and the spike in energy prices may act as a drag on consumer sentiment, with shoppers likely to curtail some spending amid the uncertainty. Ultimately it will depend on how transitory the surge in energy prices proves to be.”
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