Politics

Once again, it’s been a crazy week that I would challenge anyone to have accurately forecast.

Last weekend, after guiding to a two-week diplomatic window to negotiate with Iran, the US bombed Iran’s three key nuclear facilities, confounding many expert opinions about Trump’s attitude to military engagements and his isolationist world view.

Clearly, this was worrying for a whole host of obvious reasons, but most importantly because of concerns about how Iran would respond and whether the Strait of Hormuz would be a target. Financial markets were preparing for a very difficult week on Monday, and the oil price rose significantly above $80 a barrel.

Unexpectedly, certainly in the world’s financial centres, Iran’s response was contained and directed at the large US airbase in Qatar. It did not cause much damage, and there were no casualties. Critically, shipping in the Strait of Hormuz was not attacked. Almost immediately after the response, the price of oil fell dramatically and is now back down at $69 a barrel.

Effectively, financial markets have quantified this surprising turn of events, metaphorically shrugged, and carried on. Later in the week, the S&P was within a whisker of its all-time high, bond yields had fallen along with oil prices, and a peace deal appears to have been agreed upon between Israel, Iran, and the US.

Meanwhile, in Europe, a critical NATO summit, which many had thought might surface Donald Trump’s apparent desire to question Article 5 of the organisation’s mutual defence pact, appeared to go as well as it could have. In summary, and whether by design or by accident, President Trump has got what he wanted: a commitment from the 32 NATO allies to spend 5% of their GDP on defence. Indeed, in a brief speech before leaving the summit in The Hague, the President hailed the agreement as a massive win for the US. The difficult part will, of course, be delivering on this commitment over the next ten years, and in the UK, given that soon GDP will be £3trn, in round numbers, that means the defence spending will be increasing from about £53bn today to over £150bn. Ouch!

Economics

This week has been relatively quiet, although later today, US inflation data will be watched closely, especially by the bond market. There have, however, been various speeches by members of the FOMC indicating a slightly more dovish approach to interest rates, including advocating for a cut at the July meeting.

In front of a Congressional Committee this week, the Governor reiterated that the FED is prepared to cut rates if tariffs have no sharp effect on inflation, but went on to say that their effects could be “large or small” – in other words, he wants to wait.

There was also more talk this week about who President Trump might want to replace Powell with next May, which also promoted a slightly more bullish view on future interest rate cuts. Whether it was these comments, the speeches or relief about energy prices, the result is that the bond market has had a good week, and yields have fallen pretty much everywhere, including here in the UK where ten-year yields are now down at 4.46% having been as high as 4.7% in late May.

Finally, I have just seen news that indicates China has agreed to trade framework details with the US, echoing what the US Commerce Secretary, Howard Lutnick, said earlier about a US-China agreement. At the moment, I do not have the details of what this means, but clearly, this is good news and indicates a further thawing in the trade relationship between the US and China.

Financial markets

This has been a good week for financial markets, although the UK has lagged principally because of the disproportionate index weight of the oil sector, which fell for obvious reasons. Indeed, the S&P has climbed about 3% this week so far, bringing it close to its all-time high. The better news from the Middle East was the key factor.

Company announcements

It’s also been a busy week for company announcements, and they will only get busier as we get into the interim results season proper. Things that stood out for me were the non-BP bid story, results from a key semiconductor business in the US (Micron), and yet another UK bid, this time from a US private equity firm for a significant FTSE 250 business, Spectris, a high-tech precision instrumentation, controls, and test equipment manufacturer.

BP

Initially, the Wall Street Journal carried a story that Shell was in talks to acquire BP. This happened after the close of the UK market, and so it wasn’t covered that extensively here. BP’s shares, listed as ADSs on the NYSE, rose over 10%. The following morning, Shell issued a statement firmly denying that it was in talks with BP, and not much more was said about it.

For me, though, the fact that this was at all credible in the first place is symptomatic of the broader issue of very depressed valuations across the UK market and the specific challenges confronting BP, which now has a very aggressive activist shareholder (Elliott Investment Management) on its register with a 5% holding. Nothing can happen now for six months (in terms of Shell’s potential interest in BP), but I am reasonably confident that in this case, there’s no smoke without fire.

Micron

Micron, the global semiconductor business, announced its Q3 results (it has an August year-end), which were excellent and somewhat better than consensus expectations. Revenues were up 37% on the same quarter last year, and HBM revenues (HBM chips are used in AI applications) were up 50% sequentially. Guidance for the full year was also raised. These results confirm that the recovery in the sector is beginning to get some traction.

Spectris

Spectris is a large (mid-250) high-technology, precision instrumentation, controls and test equipment manufacturing business. It is not represented in any of the W4.0 strategies, but is a highly regarded, well-managed UK business.

The fact that it is now disappearing from the market is yet another reminder of the challenges confronting the broader UK equity market, where the number of listed companies is shrinking at an alarming rate and where very few companies appear to want to list.

I believe this is the direct result of political, regulatory and institutional failure and neglect – a subject I have written several times on Woodford Views. It also reflects the profound undervaluation of the market and the majority of its constituents. As long as it remains so, corporate and PE buyers worldwide will continue to shop in it for bargains.

What to look out for next week

Alien invasion? Given the extraordinary events of this week, who knows?

In terms of predictable events, the busy schedule of official economic data will again do the rounds in the US and across Europe.

In the UK on Monday, we get a whole range of data including quarterly GDP, balance of payments and business investment figures. There is important labour market data on Thursday in the US, including employment and wage data and initial jobless claims. The results season has yet to kick off in earnest, so only a few smaller businesses are reporting next week.

Over the weekend and early next week, I expect markets will be looking closely at the details of the latest trade “deal” announced between China and the US. I will keep you posted if anything material emerges from that, but in the meantime, until the next big surprise, markets, both bond, equity and commodity, seem set fair for the time being.