Weekly Market Update: a divided America

The latest economic news and market highlights from the UK and abroad.

This week's headlines: 

• Geopolitics still in the driving seat – the ongoing conflict in the Middle East continues to shape markets, even with a current ceasefire. Peace talks appear stalled, leaving the Strait of Hormuz effectively blocked, with significant implications for the global economy.
  
  
• UK inflation ticks higher – inflation rose 3.3% year-on-year in March, the first figures to include the impact of the US-Israel war with Iran. Higher fuel, airfares and food prices were largely to blame for the increase. 
  
  
• UK unemployment drops – joblessness unexpectedly dropped 5.2% to 4.9% in the three months to February. However, the decline was mainly due to people leaving the workforce, rather than stronger hiring.
  
  
• New Fed Chair nominee speaks – Kevin Warsh, Trump’s choice to be the next Chair of the Federal Reserve, was questioned by senators in the US. He told senators the Fed would remain independent if he replaces Jerome Powell – but made no promises to cut interest rates, with inflation likely to limit any easing.
  
  
• Apple announces new CEO – after 15 years in charge, Tim Cook announced he’s stepping down as CEO later this year, to be replaced by John Ternus. Ternus, a 25-year veteran of the technology giant, faces the challenge of steering the company deeper into the AI era.

Markets continue to be driven by the developments in the Middle East and the closure of the Strait of Hormuz. This is creating supply chain fragility and pushing up commodity costs, particularly oil, which is feeding through into inflation. The longer this persists, the greater the risk that these pressures will become more entrenched and have longer-lasting economic effects.

This marks a clear shift in the economic outlook since the start of the year, when most were expecting modest growth and continued disinflation. Now, both growth and inflation will be impacted by the conflict, which needs to be considered in investment decisions.

Chart of the week - the US are split

There’s little global support for the actions of US and Israel in the Middle East, and this includes Americans. As the chart above shows, most US citizens - particularly Democrats and Independents - hold a negative view of the conflict. The exception, perhaps expectedly, is Republicans and ‘MAGA’ voters - Trump’s core support, providing some domestic backing for his actions.

But this is not the case when considering deploying US troops to the ground in Iran. In this scenario, even MAGA voters are generally opposed.

Either way, the conflict remains highly controversial and the more it effects Americans at home, the less support Trump will have and the greater the pressure to find a conclusion.

UK – The ongoing conflict, rising inflation numbers and mixed earnings weighed on performance for the UK markets over the week. Companies such as Sainsbury’s (FTSE 100) and WH Smith (FTSE 250) warned that their earnings may be affected by the war, which caused share price declines.

US – The S&P 500 index hit a record high above 7,100 earlier in the week, hoping for an end to the conflict. Strong PMI numbers and semiconductor earnings also fuelled the rally, although software stocks came under pressure due to potential competition from AI companies.

Oil – Oil continued its rise this week, increasing to around $105 a barrel, as the ongoing blockade of the Strait of Hormuz continues to restrict supply.

Emerging Markets – Emerging Markets were also impacted by events in the Middle East, weighing on sentiment. Several Asian economies are also net importers of oil and therefore are also vulnerable to supply shocks. Tech heavy markets such as Taiwan were positive this week thanks to continued AI spending and enthusiasm.

If you’d like to explore these themes in more depth, our investment team has set out their latest thinking in our article, “Uncertainty in markets, certainty in what we’re doing”, which you can read here: Uncertainty in markets, certainty in what we’re doing. 

Catch the recording of our Q1 Let’s Talk Markets webinar, when the team discussed recent market developments, key drivers behind portfolio performance, and the outlook for the months ahead. 

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