Top stories
- Middle East tensions continue to build, with fears over a wider conflict, and a continued lack of negotiations pushing oil prices higher, leading to bonds selling off as expectations increased of central banks needing to raise interest rates. Yesterday, President Trump said he was considering a “massive attack” on Iran to force negotiations on a peace deal, adding that he was “close to making a decision” on “attacks that would be bigger than ever before”. The June 17th interim peace agreement appears increasingly obsolete.
- The Houthis, an Iranian backed group in Yemen, said that they would impose a maritime blockade on Saudi Arabia, effective immediately, putting at risk the safe passage of millions of barrels of oil that are exported via the Yanbu port on Saudi Arabia’s Red Sea coast. The port is currently handling additional oil exports via the Saudi East-West pipeline, which is running at full capacity as an alternative to the Strait of Hormuz.
- The oil price has climbed every day this week, closing last night above $100/barrel for the first time since 22nd May. Brent Crude is up 37% this month. European Natural Gas prices are now at their highest level of this conflict (though for some context remain well off levels seen in 2021 and 2022).
- Andy Burnham officially become UK Prime Minister on Monday, and promised to make his premiership a “circuit breaker” for Great Britain as he pledged to bring in a new economic and political model for the country.
- The European Central Bank left interest rates unchanged at 2.25%, as expected, at their policy meeting yesterday. The bank’s statement noted that “uncertainty remains high and the full inflationary impact of the energy shock has yet to play out”. ECB President Christine Lagarde said the decision to leave rates unchanged was unanimous but there were some members of the governing council “who asked themselves whether we should not consider a hike”. Lagarde said the breakdown of the US-Iran ceasefire had led to “serious developments” in commodity markets, but the ECB was “well positioned to navigate the uncertainty caused by the conflict”. Markets are pricing an 89% probability of a rate hike at the next ECB meeting on 10 September.
By the numbers
UK unemployment was unchanged in the three months to May at 4.9%, slightly better than an increase to 5% expected. Payroll employment was broadly flat, with a decline of 4,000 jobs in June per the HMRC data. Private sector wage growth was up 2.9% year on year, the slowest pace in five years.
- UK inflation for June was 2.6% year on year, easing from 2.8% in May and below consensus of 2.7%. Lower petrol prices were the primary driver of the lower headline figure. Core Inflation (which excludes food and energy) was also 2.6%, unchanged from May and ahead of consensus which was 2.5%. Inflation is expected to move higher in July as the 13% increase in the household energy price cap feeds into the data.
- President Trump announced a new 50% tariff on many Canadian goods for “discriminatory treatment of American products” including cheese, alcohol and automobiles. The levy will be effective in 30 days and is applied under Section 338 of the 1930 Tariff Act, a provision that has not been previously used to set levies. Meanwhile, the US has now implemented the Section 301 tariffs to replace those imposed on ‘Liberation Day’ that were subsequently declared illegal by the Supreme Court. The new tariffs on 60 countries are in line with what was announced last month, and are a result of the US alleging “forced labour practices” in supply chains. The EU, Canada, UK and Mexico will face a 10% tariff while others including Japan, South Korea and Australia face a tariff of 12.5%. The duties replace the temporary tariffs imposed after the Supreme Court ruling in February.
Market movers
How to fix a country living beyond its means? That’s the challenge facing new UK Prime Minister Andy Burnham, and to be fair, plenty of leaders of other Western governments. Burnham secured the support of 94% of the parliamentary Labour party and takes on his role with a working majority of 165 seats and a timetable of over three years until the next election. So, plenty of time to turn things around? UK assets were little moved by the handover of power; Burnham has repeatedly made clear his commitment to the ‘fiscal rules’ that proved such a burden for previous Chancellor Rachel Reeves. The ‘new’ government is being watched closely; the appointment of centrist John Healey, a former Treasury Minister under Tony Blair, as Chancellor, was a surprising move but well received. Healey resigned from Keir Starmer’s government only last month complaining of a lack of funding for his previous ministerial department – defence. His appointment suggests defence spending is now on a faster trajectory than previously. The immediate priority for the government though is cost-of-living issues, but the bigger policy challenges and compromises will come later in the year with the budget, and the “ten-year plan”, which is likely to try and address issues around health, welfare and social care. At that point, investors will have plenty more evidence and detail to form their views on UK Gilts and Sterling.
The investment lens
With both sides downplaying diplomacy, the path for the US-Iran conflict is becoming even more uncertain, and while the oil price has once again passed $100/barrel, it is not yet at a point where it is causing stress in markets or forcing President Trump to the table.
The outcomes remain somewhat binary – escalation back to full blown conflict, or a return to a ceasefire and the framework for a longer-term peace deal under the memorandum of understanding signed by both sides in June.
- A return to a ceasefire may be some time away however, so we may find ourselves in a period of continued relatively low-level attacks by both sides for an extended period. This, of course, means the Strait of Hormuz, and potentially Red Sea routes will remain ‘closed’ to normal levels of shipping, putting upwards pressure on commodity prices. If we do see diplomacy prevail, and some sort of mechanism to allow shipping to start to normalise, then there is clear downside to current pricing for oil and gas.
However, for the moment things appear to be getting worse, not better. Both sides continue to ramp up the threats of more intense strikes, on a broader range of targets. The US is unable to ‘control’ the Strait of Hormuz given it cannot remove all threats to shipping. Iran’s drones and missiles have a range of hundreds of kilometres from the shipping lanes. Iran, having resupplied during the brief pause in the US blockade, appears in no hurry to reach a deal, and the risks of the conflict extending beyond the US mid-term elections in the autumn is now very real. The US has seemingly lost control of this crisis, and President Trump’s threats are being persistently ignored by Iran. For now, the oil price is moving higher, but there is still the risk of much higher moves, and renewed talk of supply concerns, if the summer ends with no resolution in sight and both sides settling in for a more drawn-out conflict.
