Derren Nathan, head of equity research, Hargreaves Lansdown: “Tensions in the Middle East are running sky high as Israel launched a wave of airstrikes against Iran’s nuclear development facilities overnight. The pre-emptive action comes just one day after the United Nations nuclear watchdog declared that Tehran is not complying with its obligations and Iranian officials threatened to open a new Uranium enrichment site. The US is not thought to be involved in the military action which threatens to scupper Washington’s attempts to find a diplomatic solution to the nuclear question, where progress has been slow.
It's no surprise FTSE 100 futures are pointing down this morning after the index crept to a record close of 8,884 yesterday as it shrugged off disappointing GDP data. Oil majors Shell and BP both felt the tailwind of rising oil prices, while precious metal producers Endeavour Mining and Fresnillo both had a good day. Risk is likely to remain off the table for now as the world braces for a response from Tehran, although recent history suggests Iran’s capabilities to penetrate Israel’s defences are limited.
The ripple effect is being felt in stock markets around the world. Asian markets slipped overnight, and European stocks look set for another rough ride after they slipped on Thursday. Sentiment among European traders is already depressed as rhetoric between EU leaders and the Trump delegation on timescales for a trade deal suggested talks could be heading for a go-slow.
US futures are also deep in negative territory with all the major indices set to eradicate yesterday’s gains, which came off the back of softer than expected consumer price index data. Core prices rose 0.1% in May, compared to forecasts of 0.2%, prompting the odds of a September rate cut by the Fed to shorten. The escalation of military action adds another factor to consider for central bankers in an already complex world as they weigh up the inflationary impact of ever-changing tariff rates and a weakening outlook for jobs and growth.
Safe haven assets are back in demand with gold prices at seven-week highs at over $3,400 per ounce. Diminishing risk appetite, as well as the potential for lower interest rates on cash paint, a positive picture for investors in the yellow metal.
The break-out of further conflict has driven a surge of nearly 8% in Brent Crude oil prices to around $76 per barrel, the highest level since February. It’s not just the outlook for Iranian exports that’s a concern but also the potential for disruption to shipping in the Persian Gulf’s Strait of Hormuz, a key route for about 20% of global oil flows and an even higher proportion of liquified natural gas haulage. A 3.6-million-barrel draw on US inventories last week, the third consecutive weekly decline, is also providing support for prices on the demand side.”
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