Markets react to rising geopolitical risks

Good morning

Another day with lower equities, higher oil and a higher US dollar.  US/Iran war obviously still a key reason, with Trump talking of ramping up attacks and Iran now suggesting UK bases are legitimate targets.  Brent crude oil traded back above $100 yesterday evening, now sitting just below, with WTI at $91, each gaining over 15% this week. 

The higher US dollar saw USDJPY reach within a pip or two of 164, stronger than expected Japan inflation overnight and the threat of further BoJ rate rises doing little to prevent yen weakness.  Both US and Japan have said yen volatility is undesirable, raising the prospect of further intervention at some point.

However, news that the US has imposed new tariffs on some 60 or so trading partners, including the UK, EU and Japan, is also damaging global markets.  The US supreme court had ruled existing tariffs were illegal, but these new tariffs have replaced some that expire this week and are introduced under the pretence of tackling forced labour.  Clearly just an excuse to keep tariffs in place.

ECB yesterday chose to keep rates unchanged with Lagarde commenting that oil prices are likely to keep inflation above target through the first half of 2027, while risks to growth are clearly on the downside.  ECB will continue to monitor incoming data, markets still price in two more rate rises in 2026, a rise at the September meeting looks on the cards even though Lagarde says there is no clear rate path.

UK retail sales data this morning were far better than markets had expected, with upside revisions to last month as well.  While the numbers surprised many, it was more in line with our thoughts that the decent weather and world cup would support consumer spending.  GBP was unimpressed though, barely moving on the announcement, with GBPUSD in the low 1.33’s and GBPEUR just around the 1.1700 area.   

Today’s calendar is all about PMI data from EU, UK and US.  Next week brings rate announcements from Fed, BoE and BoJ.  We’ll also have inflation from Australia, Germany, EU and Tokyo, GDP from US and EU, plus core PCE from the US.  Potential for a volatile week ahead.

Before then we have a weekend to enjoy.  Weather here stays in the high 20’s, possibly creeping back into the 30’s next week, although there is one blob of rain on the BBC forecast for Sunday which suggest the garden may get a sprinkling of much needed water.  Sports fans will be a bit lost with little on the calendar other than the Hungarian F1 grand prix on Sunday.  Perhaps that rain will coincide with the start of the race.

Have a great day, and a great weekend as and when it comes…

-  09.00 EU manufacturing, services PMI

-  09.30 UK S&P manufacturing, services PMI

-  14.45 US S&P manufacturing, services PMI

-  15.00 US new home sales

-  16.30 ECBs Lane speaks