Peace Out, Volatility In
Not even the soccer World Cup distractions could curb huge swings in financial markets last week. Renewed tension between Israel and Lebanon and the effective end of the ceasefire between the United States and Iran were the main culprits.
Surprisingly, and despite ongoing volatile conditions, the US markets remained positive, ending the week a little over one per cent to the good, whilst Europe, the UK and Emerging markets were all moderately weaker.
Crude oil was a predictable source of strength, climbing 5% amid persistent threats between Washington and Tehran. The Strait of Hormuz remains the key issue, with Iranian attacks on oil tankers effectively closing it again. Russia’s suspension of diesel exports, following Ukrainian attacks on its oil refineries, has added further pressure to an already tight supply.
All of this suggests investors should be concerned, but the reality is that there is a general belief that a diplomatic solution will eventually by achieved between Iran and the United States.
What this has done is to crystallise investors minds into the need to take profits in some high-profile technology shares and focus more attention on ‘chip’ manufacturers. Last week saw Korean memory chip maker, SK Hynix raise $26.5Bn in the largest offering of shares by a non-US company. The shares on Friday closed at a 13% premium to its issue price. However, the start of this week has seen significant profit taking in Korean trading with the shares down double-digit percentages.
In company news, UK-based airline easyJet welcomed a surprise counterbid from private equity group Apollo, which outbid rival Castlelake. The board accepted the offer, sending the shares up 20%.
French tycoon Xavier Niel bought a 15% stake in Vodafone worth $6 billion. The market welcomed his investment, sending the share price up 11%, and viewed it as an endorsement of the company’s current business plan.
Chinese e-commerce and cloud computing giant Alibaba rose after reports that Beijing may permit AI companies to buy Nvidia H200 chips. Looser restrictions are expected to accelerate China’s AI infrastructure development. Alibaba’s shares gained more than 16%, rebounding from oversold levels.
This week, attention will turn to the start of the second-quarter US earnings season, beginning with the major US banks. Recent results have been strong, with many companies beating consensus forecasts and raising guidance. However, expectations are high: S&P 500 earnings are forecast to grow by 25% this year, so any disappointment could trigger sharp share price falls. Investors will also closely watch new Federal Reserve Chair Kevin Warsh deliver his first testimony to Congress. Finally, June’s inflation data could be a key market-moving event, as inflation has exceeded the central bank’s 2% target for more than five years. A softer reading may offer hope that policymakers can set a credible path back to target.
Brent crude prices climbed sharply last week as renewed tensions in the Middle East heightened concerns over global oil supplies. With the Strait of Hormuz once again in focus and Russia's diesel export suspension adding further pressure, markets have begun to price in a higher geopolitical risk premium.