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Oil prices fall despite tensions in the Middle East

Watch our latest Market Moves, providing a round-up of the market movements and the global investment outlook for the week beginning 15th April 2024.

| 7 min watch

This week Chief Investment Officer, Patrick Farrell, reflects on market movements from the past week, provides an outlook on the economy more generally, and considers the implications of what is unfolding.


Transcription


Erica Whyte:

Thanks so much for being here for this episode of Market Moves. My name is Erica Whyte alongside our Chief Investment Officer, Patrick Farrell. Here to break down the market moving events of the last week, namely newly released U.K. jobs and wage data tells a confusing story. Meanwhile, oil prices fall despite tensions in the Middle East. But what's been the impact on markets?

Well, Patrick is here to break it all down. Hi, Patrick. Welcome back. How are you?

Patrick Farrell:

Very well, Erica. How are you?

Erica Whyte:

You? Good. Great for you to be here with the markets this past week. What can you share with us?

Patrick Farrell:

Well, the last week we saw we did see some weakness come through in equity markets and this is the first time that we've actually seen some weekly declines coming through, particularly from the U.S. So what's been causing it? A number of things. But when you actually add it all up, when you look at the rapidly changing environment or how many interest rate cuts the US Federal Reserve is looking to do this year, we're getting commentator is coming out every other day know basically saying, look, don't expect too much.

Maybe we'll get one this year. Maybe, maybe two. And then at the moment the market's sort of pricing in probably around by one rate cut this this year in 2024. What is happening is that the central banks are starting to diverge in terms of when those expectations are coming down. So the ECB and the Bank of England are likely to cut rates earlier than what the US will be. However, some of the wages numbers that we highlighted have come out and they've been on the upside surprise. However, the employment numbers are weakening off a little bit and the bank of England are very well aware that the situation for mortgages is that those resets will continue to happen. It's going to have a big impact on household cash flows, so that is going to slow down spending.

So from a UK perspective, we're certainly not out of the woods and the European sort of situation has already demonstrated that a lot of the industrial production continues to be weak and that's their main sort of driver of growth coming out of Europe. And when you go back to the US, it's all about the consumer. And the consumer have been spending money and they're very happy to spend money and they're very happy to put it on their credit cards. But that's only because it's a situation where they've still got jobs.

Erica Whyte:

Totally.

Patrick Farrell:

And they're very happy to sort of say, look, I know I'm spending a lot of interest on my credit cards and other loans that I've got, but if I've still got my job, I'm still going to continue to do that.

Erica Whyte:

So what are the implications of these moves? Patrick, what can you share with us?

Patrick Farrell:

Well, I think what it is indicating is that bond markets have already sold off, so yields have already risen. Equity markets were very slow to sort of acknowledge the uptake in terms of way market yields have gone, because they've just been so interested in terms of where earnings have been. And I think the situation in the US is that earnings have been quite strong, but we're about to go into the next earnings season. In fact, we've just started and some of the earnings results so far for the banks have actually been quite good but very muted in terms of their outlook. So it is very much the sort of by the rumor sell the fact potential that we are seeing at the moment that's very much in association with we've seen a big rise in market yields and that's going to put pressure on some of those long duration stocks as well as the geopolitical risk that we've got in the Middle East.

So have a very big risk situation and I think investors are just sort of weighing up the pros and cons in terms of what that looks like and are very happy to sort of take the latest earnings results, but then maybe take risk off the table. And so this is where I think some of that market weakness that we're starting to see is actually going to follow through a little bit more.

Erica Whyte:

So that was something I mentioned earlier, was that oil prices are falling despite these tensions. So I think that when we do see these risen tensions, I think people do expect oil prices to rise. But that actually hasn't been happening.

Patrick Farrell:

Well, I mean, it certainly has been happening. So what we've been seeing is that oil prices and gold price has been going up quite substantially,

Erica Whyte:

Which is par for the course for when there is turmoil.

Patrick Farrell:

It is par for the course. And this has been in an environment where the US dollar has appreciated as well. Now, because these commodities are priced in US dollars, if you've actually seen a rise in both the gold price, for instance, and the US dollar, it's actually been a double whammy in terms of the impact. So there has been a lot of demand for those commodities and that's very much from a risk-based approach around the tensions that are continuing growing in the Middle East. Things are not de-escalating at all and from a market perspective, what we've got to realize is that even though the hostilities are very worrying, the market potential is that if it does broaden out to a broad into a broader conflict with Iran, that you end up it is going to have an impact on oil markets and you're going to continue to see military forces in the area and tensions are going to be very, very high.

So under that sort of regime, this is where the gold price is basically getting, seeing some of the benefit coming through, but also oil prices. So even though we had oil come off a little bit, it's still a pretty high levels and up around 20-odd percent so far this year. So you now that's all flowing into the inflationary impact that we're starting to see creep back in. So it's a very circular economy, very much so in terms of the impacts on markets. And we've just got to keep an eye on things very, very closely.

Erica Whyte:

Thank you so much for all your expertise here, Patrick. Great to have you back.

Patrick Farrell:

Thanks, Erica. Great to be back.

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Oil prices fall despite tensions in the Middle East

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