Its all rock and roll to me

Peace talks off, oil up, stocks down, another day, another dollar. Debating in the office yesterday, what would happen to the equity market next, should we get a meaningful peace agreement between the US, Iran and Israel? My colleague Rob Murphy was understandably of the view that we would get a big initial surge, a bit like a sugar rush, followed by a drop-off. My view is a slightly different take. I think what’s more likely is the old travel-and-arrive scenario: buy on the rumour, sell on the facts. Markets have rallied, assuming a deal will be reached; then they will go, told you so, and we get a pause for breath. We agree that a period of consolidation post any peace deal would be welcome.

Longer term, what happens is something more of a debate. Karen Ward, JP Morgan’s chief market strategist, posted on LinkedIn and asked the question. Is it rational that markets touched new all-time highs last week when the world remains geopolitically challenged? The simple answer, she believes, is yes. Every new bout of geopolitical troubles prompts yet more spending. To my mind, as long as the events of the past few weeks do not derail the global economy too much, it’s hard to see what would undermine stocks; valuations don’t count as a reason unless earnings fall.

A quick note on the UK economy: the headlines will, I am sure, be welcomed by the Treasury. The UK unemployment rate unexpectedly fell to 4.9% according to the ONS. However, as one would have expected, it’s not more people finding employment but a drop in the participation rate; simply, those without work are giving up looking for a job. This is backed up by forward-looking indicators from payrolls, vacancies, and redundancies, which continue to deteriorate. This morning, we got the latest UK inflation data, which was no worse than expected. The rate came in at 3.3%, in line with expectations, the core rate at 3.1%, which excludes energy, was slightly better than forecast.  On the back of this, it is fair to say the Bank of England will be in no hurry to raise interest rates, nor cut them to be fair.

Steven Walsh, the Fed Chair in waiting, appeared before the nomination committee last night, and what’s clear is that he is hawkish by nature, describing low inflation as the Fed’s armour, its vital protection against slings and arrows. As we watch for the impact of higher oil prices on inflation, an article in yesterday’s FT by the Head of Northern Trust’s asset management business makes the case for AI as a deflationary force, as many companies are taking efficiency gains from AI. Indeed, Morgan Stanley recently noted that productivity, measured as output per employee, is rising faster in industries with high AI exposure than in those with median or low AI exposure.  When Warsh hints at the possibility of rate cuts later in the year, this may be what he is betting on.

With many major US corporates reporting in the next 24 to 48 hours, the focus at least in the short term may turn away from the Middle East.