Derren Nathan, head of equity research, Hargreaves Lansdown: “The path to de-escalation in the Middle East took one step forward and two steps back over the weekend. Over 20 freight vessels carrying mainly energy cargoes passed through the Strait of Hormuz on Saturday after Iran signalled the reopening of the critical thoroughfare. But by Sunday, reports surfaced of shots being fired at a commercial vessel by Iranian forces, and the seizure by the US Navy of an Iranian freighter.
The rhetoric has once again intensified as attention moves towards a second round of negotiations between Tehran and Washington in Pakistan, but it's not at all clear whether these discussions will take place. Whether this impasse proves to be merely a detour on the path to a resolution remains to be seen, but more volatility would seem the most likely outcome. Asian Pacific indices were mainly up overnight, but European indices and the FTSE 100 have given back some of Friday’s gains, and US stock futures are down.
Brent Crude prices have climbed 5% to over $95 per barrel just days after they fell by about $12 to $85 on Friday on hopes of the resumption of energy cargoes through the Strait of Hormuz. Further downstream, the crisis is starting to have tangible effects, with several airlines cutting back on less profitable routes and the International Energy Agency warning that European jet fuel supplies could run out by early June. Over time, the energy supply chain is likely to pivot and become less dependent on the Strait, but so far, only around 20% of oil traffic has been diverted, and there is no instant fix.
There are some big names in Aviation reporting this week, and some cautious guidance is to be expected. US carriers United and American Airlines report on Wednesday and Thursday, respectively. The effect of short-term oil price fluctuations is likely to be less pronounced higher up the chain, but a prolonged hit to airline profitability could, in time, feed through to demand for aircraft and engines from the likes of Boeing and GE Aerospace, who are also set to report this week.
Interest rate expectations continue to bounce around, hanging on every twist and turn in the Gulf. But Kevin Warsh's testimony to the US Senate tomorrow could provide a longer-term steer on the direction of American monetary policy as the Fed chair frontrunner sets out his credentials for the role. Central bank independence and the potential for structurally lower rates as AI productivity gains start to bite are likely to be key points of focus.
There are several big economic data points to keep an eye on, too, as markets weigh up the impact of the conflict on inflation and demand. US retail sales in March are expected to show further resilience tomorrow with a forecasted 1.3% increase. On Wednesday, expectations for UK CPI data have been moving up since the conflict broke out, and March price increases are now expected to be nudging 3.5%. Anything higher is likely to be negative for sentiment towards UK equities, but we still think domestic rates will remain on hold while the conflict continues. Attention then shifts to PMI Thursday, with headline numbers for the US, the Eurozone, and the UK providing a more forward-looking snapshot of the global economy.
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