This week, markets have been driven by the sharp drop in oil prices following the U.S.–Iran peace framework, the powerful relief rally in global equities led by tech and the SpaceX IPO, and shifting expectations ahead of new federal reserve chair, Kevin Warsh’s first monetary policy meeting.
Relief reached oil markets on Monday following news of a brokered peace agreement between the United States and Iran that could lead to the reopening of the Strait of Hormuz. The Memorandum of Understanding is expected to be signed on Friday and would introduce an immediate ceasefire, lift the naval blockade of the Strait, and include a commitment from Iran not to pursue nuclear weapons. Oil prices fell on the news, with WTI crude declining around 4% to approximately $81.50 per barrel, while Brent crude also dropped around 4% to roughly $83.75 per barrel. US equity markets responded positively, with the Nasdaq rising 3.1% and the S&P 500 gaining 1.7%. UK markets, however, failed to share the optimism. The FTSE 100, which has a heavy weighting towards oil and commodity stocks, slipped 0.4% in early trading as lower energy prices weighed on the index.
Meanwhile, SpaceX continues its ascent, climbing 20% on Monday after breaking trading records at its IPO. It has now taken over Amazon as the world’s most valued company.
Over in the UK, headline inflation for the month of June remained unchanged at 2.8%, with food inflation slowing considerably. Transport prices (6.8%) were the biggest positive contributor to the annual rate of inflation, with higher fuel prices the main culprit. Inflation is still above the Central Bank’s 2% goal and the data hints that broader price pressures related to the Iran conflict may take a little longer to fully work themselves through the economy. For now, it is expected that the Bank of England will take a wait and see approach before making any change to monetary policy.
Over in China, retail sales fell by 0.6% year on year in May, reversing a 0.2% increase in April. The sharpest decline was in automobile sales, which dropped by 16.1%, reinforcing the broader trend of consumers holding back on big-ticket purchases. It has been noted that that May’s retail sales figures were distorted by base effects, as they were compared against unusually weak data from the same month last year. On that basis, they suggest that underlying consumer spending has remained broadly stable. Meanwhile, China’s urban unemployment rate edged down to 5.1% in May from 5.2% in April.
Over in Japan, the Bank of Japan raised interest rates by 25 basis points to 1%. The decision reflected concerns that higher energy prices, driven by the conflict involving Iran, could feed through into broader inflation via disrupted supply chains and rising oil costs. Policymakers believe inflation could temporarily move above their 2% target as energy prices increase. This means that the Bank faces a murky path of unclear terrain moving forwards. While higher interest rates can help contain inflation, they also raise borrowing costs for households, businesses and the government. However, they also said that financial conditions would remain accommodative overall.
Investors will be watching closely this week as the Federal Reserve holds its first monetary policy meeting under its new chair, Kevin Warsh. Although questions have been raised about whether Warsh might yield to pressure from President Trump to cut interest rates, it’s worth remembering that his vote is also just one among many on the committee, each carrying equal weight. For now, markets expect the Fed to keep interest rates unchanged. We also have US retail sales and UK unemployment.
Nicola Tune, Portfolio Specialist