Investment Viewpoint: geopolitics puts oil price in focus

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What happened in financial markets last week?

• At the end of last week, geopolitics were back to the forefront as Israel carried out airstrikes on nuclear facilities in Iran. Iran has retaliated and threatened possible strikes on US facilities in the Middle East. As one would expect the oil price responded, up over 7% overnight last Thursday, and risk assets were down. The human cost of tensions in the Middle East continues to rise but the main impact for financial markets remains what happens to the oil price. As of last Friday, the Brent price was 11% above the average since the start of the year. This will negatively affect growth in the developed world but not enough yet to seriously change the growth trajectory. We will continue to monitor this. Historically, armed strikes between countries in the region have been targeted to avoid a broad confrontation, and oil price spikes ease in the following months.

• Trade negotiations continue and China and the US seem to be making some progress. Some export restrictions between the two countries have been lifted, but there is still some distance to go. Negotiations between the EU and US are moving slowly and the EU negotiators do not believe a July 9th deadline will be met. As a result, there is a risk of hard-hitting headlines coming from the US administration, but we remain of the opinion that the administration will avoid implementing very harmful policies.

• We think that the summer months will be more difficult for risk assets. We have staged a big recovery due to improvements in the policy outlook. From here positive surprises will be more difficult and there is potential for some disappointments. However, we still believe that the global economy is still in expansion mode so we would not be reducing risk asset exposure even in the face of some volatility.

What were the main recent economic developments?

• We received very good inflation data from the US with both core CPI and core PPI coming in lower than expected. There was some element of tariffs in these figures, so it is even more pleasing to see the deceleration. Core CPI now down to 2.8% year-on-year and core PPI dropped to 2.7% year-on-year. As we get closer to a full implementation of tariff policies the inflation rate is likely to rise but if pricing momentum is weak going into this adjustment the second-round effects could be very muted. The bond market liked it with the US 10-year yield down 15bps over the week.

• We got the first indication that any frontloading effect due to tariff uncertainty could be waning. China released its trade figures, revealing a big drop in trade between China and the US. Exports to the US slumped by 34.6% year-on-year and imports fell 18.1% year-on-year. Much of the focus on the impact of tariffs has been on the US economy, but these figures show the impact is wider. Meanwhile, China’s core inflation rate just about held in positive territory (0.6% year-on-year), so the economy is still skirting with deflation and does not need too many disturbances.

The week ahead: what to watch out for

This week we will get updates from the two big economies. Retail Sales and Industrial Production will be released in the US and China.