Politics

Probably the two most important events of this week have been the war between Israel and Iran, which started last Friday, and the G7 meeting in Canada. When conflict rages in the Middle East, there are clearly risks for the global economy. This is due to the region being a prolific oil and gas producer and a major thoroughfare for shipping. On this occasion, financial markets fell and then stabilised, gold rose, and the oil price spiked by about 10% to $77 a barrel. 

Given recent events, this feels like an appropriate response. Somewhat surprisingly, it lacks the market hysteria that accompanied President Trump’s “Liberation Day” tariff announcement back in early April. Maybe this is because Trump’s tariff announcement was a unique event (especially in comparison to the somewhat more textbook Biden administration). And, because the world may have sadly become far more accustomed to conflicts in the MEA region. 

Approaching the end of the week, financial markets have also had to begin factoring in another evolving risk in the conflict. What the US will do next and what the potentially far-reaching implications of their involvement may be. I do not intend to forecast what the next few days will hold. But I do hope to provide some context for readers and investors. For those who are naturally concerned about the recent proliferation of global conflicts, observe the chart below: 

This shows the S&P 500 Index on a log scale over the last 100 years, punctuated with all of the world’s major conflicts during that time. Two things are noticeable. Firstly, the regularity of various conflicts in the first half of the century (despite the last twenty years having been relatively peaceful). Secondly, the chart clearly depicts financial crises, not localised wars, as being responsible for majorly disrupting the remarkable progress of the US equity index.

So, an important lesson for long-term investors, as is so often the case, is not to ignore these localised conflicts but to always be mindful of their limited impacts on the steady and sustained growth of the global economy and financial markets over longer periods.

Finally, for those investors who are worried about the impact of the conflict on the oil market, here is some interesting data: 

Since sanctions were imposed on Iranian oil exports, China has become their principal customer: OECD economies do not currently buy any oil from Iran. So, although this conflict could, of course, disrupt the global oil market due to where it is, it should be highlighted that any resolution of the conflict, as and when it comes (if it comes) could see Iranian oil once again flowing to global markets - potentially leading to lower, rather than higher, prices. 

As for the G7 meeting in Canada? Donald Trump did leave early, seemingly to address the global event I just touched upon. Aside from that, nothing of great significance emerged. At least not anything over and above the usual output of such get-togethers.

Economics

The most important economic events this week were the interest rate decisions of various central banks. As expected, the Swiss cut to zero, whilst the FED and the Bank of England both held rates. The FED Governor, who is under considerable pressure to cut rates from President Trump, announced that because of current uncertainties (especially in relation to tariffs and their ultimate impact on prices) the Committee had decided to keep rates on hold. 

This comes despite falling inflation, moderating wage growth and a slightly lower growth forecast. Importantly, the Governor also stated that he sees no sign, at least in the near term, that the US economy will weaken. He even went on to say that the US economy had defied all kinds of forecasts that it would weaken over the last three years and that it was “remarkable” that it had done so. 

Additionally, it is important to mention that although the FED lowered its growth forecast to 1.4% this year and 1.6% the next, this is only a marginal reduction. So, no looming recession as far as the FED is concerned. And, although opinions remain broadly spread, consensus remains that later in the year, when the impact of tariffs on inflation will be much clearer, there will be an expectation of two 25bps cuts. 

As expected, the Bank of England also kept rates on hold. I think this is a mistake. Although the committee vote was split as usual, there was a dovish shift, with six members voting for no change, and an increase to three members voting for a cut (two voted this way at the last meeting). But, the Committee expects a significant slowing in pay growth for the rest of the year and now also sees general deflationary pressures emerging from the labour market.  

Their meeting and decision followed the release of UK inflation data earlier in the week, which was unremarkable and pretty much in line with expectations. My guess is that CPI inflation remains around current levels for a few more months, before it then starts to fall through the latter part of the summer through to year-end. In 2026, my expectation also is that UK inflation continues to fall back to target, before dipping below 2% as the year progresses. 

Although I still believe the MPC is being too cautious, their decision to hold almost guarantees, as I have been saying, that there will be a cut at their next meeting in August - followed by another cut in November. Both cuts would take base rates to 3.75%. Although belated, I believe these cuts will underwrite further growth in the economy and further gains in the UK equity market; along with a fall in ten-year gilt yields to 4% (and possibly below) by year-end.

Finally, I thought I would round off this section with some positive news, which I feel received very little attention. According to the British Retail Consortium, UK consumer confidence hit its highest level since December last year in its latest reading. Of particular note, was the apparent increase in confidence amongst Gen Z, possibly reflecting a large increase in the minimum wage (which came through in April). This is positive and deserves recognition. 

Financial markets

Although geo-politics and economics have kept us busy, markets have been relatively subdued this week. Equity markets are down following the outbreak of war between Israel and Iran - yet the falls have been pretty modest. Especially, bearing in mind the rally we’ve all witnessed since early April. In bond markets, yields on the whole have fallen. In the UK, ten-year yields are now hovering just above 4.5%. Despite having been as high as 4.75% as recently as the 21^st May.

What to watch next week

The ongoing conflict in the Middle East will continue to preoccupy global equity and commodity markets in the week ahead. It appears as if a diplomatic window has opened for two weeks during which negotiations between the US and Iran will take place, and naturally, this has been met with a modest rally in financial markets today.

However, in the meantime, the conflict continues between Israel and Iran, and so tension in the oil market, in particular, will continue. Today, for example, Brent Crude is up over $3.50 a barrel at $80.6. I am watching this closely, and it is beginning to cause some concern given the impact this higher price may start to have on global inflation rates if it is sustained.

As usual, next week's economic calendar includes lots of data and government bond auctions. Perhaps the most important are the US durable goods orders and labour market data on Thursday and US inflation data on Friday.

The corporate calendar is about to get much busier after a relatively quiet few weeks as we approach the halfway point of 2025. I expect to see lots of pre-close trading statements in the days ahead and of course in the next few weeks and months businesses with calendar year ends will start to report their interim results.