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FTSE 100 rises even as Israel-Iran conflict intensifies
Friday’s risk-off moves have not been replicated in early trading on Monday, with stock markets rising modestly and oil prices remaining quiet for now.
Stocks hold firm despite Middle East conflict
The outbreak of conflict between Israel and Iran caught markets by surprise, sending stocks in Europe and the US sharply lower, but the losses have halted over the weekend.
This might seem odd, but while the conflict could yet become a lot more serious, it has for the moment not spread to widespread targeting of oil installations or Iranian attacks on tankers in the Straits of Hormuz, through which passes around 20% of the world’s total consumption of oil. The US has also refrained so far from attacking Iran directly, which would be a major escalation. US forces have helped shoot down drones and missiles in defence of Israel, but have avoided striking Iran itself.
What are the key risks?
If this conflict continues on current lines, then it is possible to see a relatively muted market reaction. If oil installations are not affected then Brent crude oil and WTI crude oil may give back some of their gains from Friday, and equities remain calm. But attacks on oil tankers in the Straits and/or US involvement would likely change the situation dramatically, and result in a further surge for oil prices and at least short-term downside in stock markets.
The news has shoved tariffs out of the way, but we should not lose sight of this other major issue. Last week’s inflation data in the US showed that, for the moment, tariff price increases have yet to show up significantly in the data. But we remain on watch for signs of economic weakness in the US and a downturn in earnings, which could still occur as global trade activity falters.
What to watch this week
Four central banks meet this week, providing plenty of interest on the macro front. The Bank of Japan (Bo,J) Federal Reserve (Fed), Swiss National Bank (SNB) and Bank of England (BoE) will all make monetary policy decisions. The BoJ is expected to hold rates, but cut back their bond buying policy, while the Fed and BoE are expected to leave rates unchanged. The SNB is expected to cut rates again, returning to 0%, the defining level of the post-Covid era.
Inflation data from the UK will be important this week too, given the worry about a period of rising prices but poor growth, known as ‘stagflation’. There are no front-rank US earnings to watch, but in the UK updates from Ashtead, Whitbread and Berkeley will be worth watching.
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