Written by Harry Brassington, Investment Manager, TEAM Plc
There has been much to be positive about in recent weeks, the US has struck a trade deals with the UK and rolled back some of the punitive tariffs imposed on imports from China. Many more countries (we are told!) are set to follow and the blue-chip S&P 500 index is flirting with the all-time highs set in February this year.
However, rising tensions in the Middle East boiled over once more with Israel and Iran trading blows. Israel has struck key nuclear and military sites in Iran whilst Iran has retaliated with strikes of its own. The result has seen Brent crude prices surge almost 10%in the past few days to $73 a barrel.
The immediate rise rattled markets, but continuing escalation could see the price of oil go higher still. Israel could yet strike Iran’s oil infrastructure, Iran could retaliate by blocking the Strait of Hormuz, a narrow yet globally significant shipping route, thereby disrupting much of Saudi Arabia’s supply. Some analysts have warned that any attacks on US infrastructure in the region could also push the price of crude to as high as $130.
The effect of higher oil prices isn’t only felt at the pumps for petrol and diesel, a disruption to the supply chain will push prices up across the board, from groceries to the cost of a holiday. This was most evident at the outbreak of the Russian invasion of Ukraine.
Elsewhere in commodities markets, safe-haven precious metals also attracted strong demand last week, including gold (+2%) and silver (+9%). A report from the European Central Bank also revealed that gold has overtaken the euro as global central banks’ second-largest reserve asset. Gold bullion accounted for 20% of official reserves last year, trailing just the US Dollar (46%).
Closer to home, the UK’s government’s policies have not positioned the country for growth, let alone a position to take an economic shock on the chin. Employers cut 55,000 jobs between March and April, sending the unemployment rate to a four-year high of 4.6%, and a signal that higher national insurance contriubtions and minimum wages are beginning to bite.
The UK economy also contracted 0.3% in April, the worst monthly contraction since 2023. The data couldn’t have come at a worse time for Rachel Reeves after announcing her spending review with a promise to turn around growth. To meet her fiscal targets, the only card left to play is likely to be more tax rises!
The Bank of England will meet later this week, and it is expected to leave its base interest rate unchanged at 4.25%. Although the outlook for the UK economy suggests it needs more stimulus, inflation remains a sticky issue, especially after annual CPI inflation accelerated in April to 3.5%, far above the bank’s 2% target rate. Money markets are currently pricing in just two quarter point cuts later this year.
Over in the US, Federal Reserve Chair Jerome Powell faces the additional threat of a social media bashing by ‘The Donald’ for what looks to be the fourth straight meeting without action.
The president has demanded that the US central bank cut interest rates immediately but there is no suggestion that policymakers will cave into political pressure. They are instead expected to reiterate that they prefer to wait for greater clarity on a range of economic and political factors, including potential changes to tariffs, tax policy, and immigration rules, before making any interest rate adjustments.
These areas could have a meaningful impact on inflation and growth, making it harder for the Fed to commit to a clear path. Investors currently don’t anticipate a rate cut until September at the earliest.
Despite wider geopolitical tensions, particularly in the Middle East, the US economy is showing resilience, with unemployment remaining low and inflation largely under control despite the impact of tariffs still to filter through to the data.
