Last week started with high drama. Shortly before Trump’s deadline was set to expire on Tuesday evening – and his threat that ‘a whole civilisation will die tonight, never to be brought back again’ – the US and Iran agreed to a two-week ceasefire.
This news duly led to a 3% bounce in global equities the following day. By contrast, the rest of the week saw markets little changed, leaving global equities up 3.7% over the week in local currency terms. The gain was a somewhat smaller 2.5% in sterling terms as the pound strengthened against the dollar which unwound some of its recent war-related increase.
Unsurprisingly, those regions which had suffered most from the war rebounded hardest. Whereas the US and UK both gained close to 2% over the week in sterling terms, Europe and emerging markets were up as much as 3.5% and 5.7% respectively.
Bonds, which had less to recover than equities, also rallied although only by 0.2%. Meanwhile, oil had yet another rollercoaster week. The Brent crude price fell back from $110 per barrel on Tuesday to a low of $91 on Wednesday before moving back up again as the disagreements over the terms of the ceasefire became ever more apparent. It ended the week at around $95.
Over the weekend, peace negotiations between the US and Iran broke down with the two sides remaining divided on many issues – including the opening of the Strait of Hormuz, Iran’s uranium stockpile and the war in Lebanon. Both sides appear to believe they have the upper hand. Oil has as a result risen further this morning to $102 although equities are down only 0.5% or so.
So far, this conflict is playing out very much the way of most previous geopolitical crises – namely, market declines are fairly limited and short-lived. Global equities are now only 2% or so below their level prior to the war. Even at their low point on 30 March, when they had fallen 7-8%, this decline was a bit smaller than the typical peak-to-trough drop seen in equities in any one year.
Our advice has been not to panic and to resist the urge to sell each time there is an alarming headline because of the danger of getting whipsawed. Last week’s events seemed to vindicate this approach. A couple of hours before Trump’s deadline was set to expire and all hell supposedly to be let loose on Iran, the two sides appeared in no mind to compromise. Yet they did and equities were up 3% the next day.
The danger of being whipsawed remains given the continuing uncertainty about how this will all play out now that the US plans to blockade the Strait of Hormuz, which will clearly do nothing to ensure the early restoration of energy supplies. It is also far from clear whether the ceasefire will hold up until next Tuesday as is the current plan.
There is still clearly a significant risk that the crisis could escalate further, leading to a further sizeable move up in the oil price and renewed decline in equity markets – quite possibly below recent lows. But the US and Iran stepped back from the brink last Tuesday. There remains sizeable domestic pressure on Trump to avoid a prolonged conflict, along with an inevitable further rise in US gasoline prices, given the damage it is doing to consumer sentiment and his approval ratings.
Indeed, Magyar’s landslide election victory in Hungary over the weekend leaves Trump – and also Vance given his visit to Hungary last week specifically to endorse Orban – leaves the White House looking rather on the back foot. By contrast, the news in Hungary will be greeted with elation in both Europe and Ukraine given Orban’s record as an obstructor and that he blocked a €90bn EU loan to Ukraine earlier this year.
Last week’s major economic releases were limited to the US and highlighted the impact the war has already started to have on the economy. Headline consumer price inflation jumped in March from 2.4% to a two-year high of 3.3% on the back of the surge in gasoline prices. Meanwhile, core inflation, which excludes food and energy and is much more a focus for the Federal Reserve, if not the wider population, edged up to 2.6% from 2.5%.
The damage being done to consumer sentiment in the US was also in evidence. Confidence, which was already depressed, fell to an all-time low in April. Still, consumer spending should hold up rather better than these numbers would suggest. Consumption has been considerably stronger over the past year than the low confidence levels would have implied and will be supported by Trump’s tax cuts which are now feeding through.
This coming week, there are no major economic releases in the US. Rather the focus will be the start of the first quarter earnings season which kicks off with many of the big banks reporting on Tuesday. US earnings are forecast to be up a strong 14% on a year earlier, highlighting one of the supports behind the equity market at the moment.
Elsewhere we have on Thursday first quarter GDP numbers out for China and February GDP data for the UK. Finally, there are the IMF and World Bank meetings in Washington.
Rupert Thompson – Economist