Global Markets Under Pressure as Energy Costs Surge

As the U.S.-Iran conflict enters its fifth week, Americans are starting to feel the impact well beyond the petrol pump. Surging oil prices, driven by the Strait of Hormuz blockage, are forcing companies to adjust operations and pass on costs. Airlines are scaling back flights and warning of higher fares, the Postal Service plans a fuel surcharge, and major household manufacturers, like 3M, are raising prices. The spike in energy costs, combined with higher import prices and growing stagflation concerns, is also shifting expectations for the US Federal Reserve, with markets now assigning roughly a 50% chance of a rate hike by the end of next year.

Closer to home in the UK, money markets are factoring in three rate rises of 0.25% before the end of this year. Just a month ago the same market was suggesting two quarter point cuts! Already, this has immediately impacted some fixed rate mortgage deals which have had to rise and does not augur well for the previously expected bounce in property prices.

Tensions in energy markets remain elevated as Donald Trump delays a decision on potential military action against Iran, extending the deadline but doing little to ease prices. With Brent crude prices around $110 a barrel, Oil markets continue to reflect a sizeable risk premium amid a deep diplomatic stalemate. Trump has floated the idea of taking control of Iran’s oil by seizing its strategic export hub on Kharg Island, comparing the idea to recent U.S. moves in Venezuela. While he stressed it would be risky and might require a prolonged presence, he insisted it remains an option amid ongoing diplomacy.

The ripple effects of global tensions are also being felt in China. Industrial profits surged early this year, rising 15% in January and February. High-tech manufacturers led the gains, with earnings in sectors such as semiconductors and drones jumping sixty per cent, while raw material producers recorded sharp profit increases. The Middle East conflict remains a key concern for China, but their energy cushions and ongoing oil imports are helping limit the economic impact.

Back in the U.K., inflation held steady at three per cent in February, the final reading before the Middle East conflict began, with core prices nudging slightly higher. Rising clothing costs were offset by falls in petrol, collected before oil prices surged following the Iran war. The pound slipped slightly on the publication of this data, while the country’s reliance on imported energy leaves it vulnerable to higher global oil and gas prices.

Commodities are not immune to the geopolitical tensions. Gold has slipped as persistent inflation concerns, reinforced by higher energy prices, support expectations that the US Federal Reserve will maintain elevated interest rates. With no yield attached, gold has become less appealing, while industrial metals such as copper have weakened as investors grow cautious on global growth and demand.

Digital assets have also faced headwinds. Bitcoin has extended its recent decline, with sentiment hit by both geopolitical tensions and regulatory developments in the U.S. Proposed new regulatory rules could limit the appeal of stablecoins by restricting yield-generating features. While the changes may bring clarity, they risk undermining a key growth driver for the sector, and other major cryptocurrencies have followed Bitcoin lower, reflecting a cautious tone across digital markets.

On the corporate front, a few well-known companies saw notable moves. Shares in Avis Budget Group surged by half, with investors betting that ongoing travel disruption will boost demand for car rentals.

Dell Technologies moved ten percent higher, supported by optimism around its positioning in artificial intelligence. In contrast, cosmetics group, Estée Lauder shares fell twenty-two percent with concerns that potential deal activity could prove costly and distract from its ongoing restructuring efforts.

A US jury found Meta (Facebook) and Alphabet (Google), legally responsible for designing platforms deemed addictive and harmful to teenagers without sufficiently warning users about those risks. The potential fine will be split 70/30 respectively between the two, but both companies are considering an appeal.

Looking ahead the market will be focusing on whether the US decide to put boots on the ground as thousands of young American troops are ready to intervene in the Gulf.

On Good Friday, the March US jobs report will be released. Whilst the Federal Reserve have a dual mandate of price stability and optimum employment, it will be interesting if the focus temporarily moves away from inflation where the risks are obvious given the events in the Gulf.

Finally, Eurozone headline inflation is likely to return above two per cent in March, but this is likely to be just the beginning of the major inflationary impulse as the impact of energy prices intensifies in the months ahead.

(Cover Image Source: Matthew Henry)