The battle lines have been firmly drawn and the market remains the pressure point.
With some sporadic strength in Asia and with US futures currently pointing higher at this very early stage, the edged ahead at the open. However, investors have seen this playbook before as the market becomes vulnerable to weakness as the day progresses on new news, so the strength is certainly not guaranteed.
Prior to the end of the conflict, sentiment is likely to remain skittish, although the premier index has some insulation from the concerns given its large exposure to the oil and defence sectors, as well as an entrenched and established raft of more stable and defensive names. The average dividend yield across the index of 3.1% provides an another attraction in terms of total return, and the 3.8% progress in the year to date is in sharp contrast to some of its international peers.
In early trade, the banks were higher given the prospects of higher for longer interest rates, alongside the oil majors on further strengthening of the underlying commodity, while Fresnillo (LON:) slipped slightly as the gold price took a rare pause for breath. In addition, the defence sector attracted some further buying interest as the global geopolitical picture remains fractious.
Black gold remains above $100 per barrel and shows little sign of retrenching. The throttling of supply through the Strait of Hormuz has been compounded by Iran signalling that it would continue to target areas which could cause further disruption. As such, the release of millions of barrels of oil by the US and the International Energy Agency has largely fallen on deaf ears, mainly due to the transitory impact these are likely to have. In the meantime, some countries are beginning to clamp down on exports in an effort to protect domestic supplies.
However, stagflation fears may well be overdone, particularly in a historic context. Real GDP continues to appreciate, albeit at a slower pace, and there are any number of sectors which continue to show corporate earnings in rude health. Consumer spending in the US remains in growth mode, even though sentiment has taken a knock over recent weeks and, of itself, a sustained rise in the oil price would certainly be inflationary, but not necessarily a trigger to recession.
That being said, the prospect of an inflationary shock will likely leave the slew of central banks announcing this week with little option but to sit on their hands. Arguably conservative by nature and in any event slow to ease rates over recent months, the market has priced out any immediate reductions to the extent that for some central banks the next interest rate move could actually be upwards. For the Federal Reserve, matters were further complicated by an inflation print on Friday which showed that core prices had risen by 3.1% in January, let alone any impact from the subsequent opening of hostilities.
Investors are unwilling to double-guess the likely duration of the conflict and have been seeking alternatives elsewhere, mainly to the benefit of the . The main indices have suffered as a result, each moving to lows for the year after another poor week. Both the and the are now lighter by 3.1% in the year to date, while the has fallen by 4.9% as growth sectors such as in the mega cap technology space have come under sustained pressure.