Susannah Streeter, Chief Investment Strategist, Wealth Club: "A fresh fire has been lit under oil prices, amid reports that attacks on Iran could resume. The US military is understood to be preparing for a resumption of military action, dashing hopes of a lasting ceasefire and sending worries of a severe energy crunch surging. Brent crude hit a wartime high of $126 a barrel, before declining as uncertainty swirled. Brent is now trading around $112 a barrel on the futures market, but even at that lower price, it’s still around 60% higher than just before the conflict began. Oil’s retreat from scorching highs has helped the Footsie bob its head above water in early trade, but investors are set to stay cautious amid the unpredictable Middle East crisis.
Trump has reportedly rejected Tehran’s plan to reopen the Strait of Hormuz and is doubling down on the US naval blockade of Iran’s ports. With oil storage limited, Iranian facilities may have to reduce production within days. There had been high hopes that a ceasefire would start to see prices at the pumps retreat, but amid this standoff, it seems that the only way is up for the cost of filling up. It’s also set to keep freight costs highly elevated, looks set to push packaging costs higher, given plastics are made from petrochemicals and could have a highly damaging effect on global food production. Urea shipments, used for fertiliser, are blocked and costs have rocketed for farmers around the world, who didn’t buy stocks in advance. The worry is that all these costs will be passed on through supply chains, pushing up the price of everyday goods, later in the year and into next year.
These are all concerns that central bankers meeting today will have front of mind. For now, a wait-and-see stance is expected to be adopted, with the Bank of England looking set to keep rates on hold, and the European Central Bank poised to take the same action. But inflation is already ramping higher, as higher forecourt prices show up in the data. But they will want to see signs that inflation is becoming embedded in the economy, through higher consumer prices, and sticky wage growth before they make a move on rates. Nevertheless, there are likely to be some calls around the table to get ahead of the curve and lift rates now. But with the economy looking set to lose early sparks of momentum as shoppers turn cautious and companies pause investment, demand is likely to be squeezed out anyway which could help keep a lid on inflation going forward. Nevertheless, financial markets are predicting that given the stalemate, and fears of a deteriorating situation will mean prices are passed on and are pricing in three interest rate hikes from the Bank of England. It’s a similar picture at the European Central Bank, which is expected to flag that a rate hike, as soon as June, could be on the cards, and two more are expected by the end of the year.
For now household goods giant Unilever, the maker of Cif and Colgate, has been spared significant fallout from the war in Iran. It posted better-than-expected growth for the first quarter, with sales volumes up 2.9%. But these numbers only captured a month of disruption due to the war, and some of the most onerous effects and increased costs haven’t yet filtered through. The production of plastic is becoming more expensive, a material the company relies on for its cupboard of cleaning and beauty brands. Energy and freight costs are also on the rise. With household budgets under the cosh, shoppers will already be looking to cut corners and could trade down to cheaper brands. Shares were flat in early trade, reflecting a more cautious outlook underlying sales growth at the lower end of its 4% to 6% range.
Problems were piling up for Volkswagen, even before the current energy crisis hit. Trump’s tariffs have had a damaging effect on sales, while cheap Chinese rivals have bitten hard into its EV business. Its first quarter results came with a big ouch, showing a 14% drop in profits. Now management has to steer the company through higher production costs, with energy prices soaring. It’s revved up a cost-cutting plan to become a leaner machine and is counting on its brand power in an aggressive product push in key markets, including China. With drivers’ budgets squeezed by the current crisis, upgrades are going to be a hard sell, but as fossil fuel prices stay elevated, it could prompt motorists to switch to EVs to save on the costs of filling up."
|
