Financial markets showed signs of frustration that the Iran conflict continues to rage on.
European and Asian equities were in the red and the US looked set to follow in the same path when Wall Street opens for trading later.
Oil held firm at high prices, while gold lost its shine as investors offloaded liquid assets and the metal suffered from a stronger US dollar.
The DXY US dollar index, which measures the US dollar against a basket of other major currencies, is up 2.6% since the Middle East crisis unfolded a fortnight ago. The dollar’s new-found strength goes back even further, with the DXY index having been on the move higher since January. Fundamentally, a stronger US dollar makes gold more expensive for buyers in other currencies and that dampens its attraction.
The loss of momentum in the gold price weighed on the FTSE 100 as shares fell in precious metal producers Fresnillo and Endeavour Mining. More broadly, it was one of those days when nearly everything at the top end of the UK market was down. In the first half hour of trading, only Shell and Schroders were up.
Despite Donald Trump’s best efforts to convince everyone the fighting in Iran will soon be over, the direction of financial markets implies that investors are beginning to accept this situation may not be wrapped up quickly.
We’re starting to get companies quantify the potential impact of the Middle East events on their earnings and that could ramp up next week once they’ve had time to look at forward orders and run the numbers on what a $100 oil price could mean for their business.
The conflict has major implications for consumer and business sentiment, potentially leading to a drop in spending as they brace themselves for a spike in costs.
If inflation has been the worry word of the past fortnight, expect stagflation to move to the front of the stage next week. An economic shock combined with a sharp rise in costs is a troubling scenario.
The UK’s latest economic reading is a major disappointment and that relates to a period pre-Iran conflict, which makes things even worse. If the UK economy is digging in its heels and refusing to grow in a ‘normal’ environment, the odds are even lower of growing against a backdrop of geopolitical tensions and higher inflation.
Berkeley
There is good and bad news for housebuilder Berkeley. While it is sticking with its full-year guidance, the broader outlook looks gloomy thanks to geopolitical issues and the likely impact on consumer confidence, inflation and interest rates.
After a difficult period after Covid, housebuilders were hoping for a gentle decline in rates leading to cheaper mortgages, increased demand, higher asking prices and build cost inflation to moderate.
The foundations of that cosy narrative have been shaken by recent events in the Middle East and Berkeley, known as a quality operator in the housebuilding space, is hunkering down.
Management looks set to prioritise cash generation, maintaining balance sheet strength and expanding on a build-to-rent strategy to reduce exposure to the ups and downs of the housing market and provide a reliable stream of recurring revenue.
Whatever the short-term prospects, Berkeley remains as committed to the capital as a Tower of London Beefeater – thanks to the location’s role as a global hub for finance and technology.
It wouldn’t be a set of results from a housebuilder without a little grumble on planning delays – a long-time bugbear for the industry – with Berkeley suggesting that improvements are not happening fast enough.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
