Weekly Market Update

21/05/2018

New US sanctions affecting Iran’s energy industry and the fallout of Venezuela’s economic collapse raised fears of significantly tighter global oil supplies, sending prices above $80 a barrel for the first time in nearly four years. Those pressures, on top of agreed output cuts by OPEC, a surprise drop in US inventories, and robust oil consumption could lead to a tighter energy market for longer than first anticipated

Geopolitics is certainly playing a role in sustaining this price rally. Venezuela’s oil supplies have fallen faster than expected as political and economic crises take hold of the energy sector, with a series of court orders authorising asset seizures and hindering exports. In addition, many investors had been counting on a revitalisation of Iran’s oil industry, with the backing of western investment to upgrade its ageing infrastructure, adding to global supplies.

Progress in the plan to denuclearise North Korea faced a setback after comments from US national security advisor John Bolton, who favours the Libya option. In 2003, Muammar Gaddafi agreed to give up his nuclear programme in exchange for a lifting of sanctions. However, he was killed by Western-backed rebels in 2011, so the parallel appeared to alarm Kim Jong-un.

Rhetoric on trade also continued to cause concern, although there was some relief over the weekend as both parties agreed to work towards a framework that will reduce the US trade deficit with China.

UK productivity dropped sharply during the first three months of 2018, dashing hopes of a rebound that were raised by two quarters of strong growth at the end of last year. Output per hour fell by 0.5 per cent during the first quarter of 2018 as hours worked grew without a matching rise in economic growth. Productivity growth has been the missing element of the UK recovery since the 2008 financial crisis. Despite the drop-in productivity, workers enjoyed the fastest wage growth since 2015, during the first quarter.

UK online retail sales went from strength to strength in April, in stark contrast to the situation on the high street. The latest figures showed online retail sales jumped 18.8 per cent year-on-year, the biggest increase since November 2016.

Political angst in Italy hit markets, with banking stocks enduring the brunt of a sell off. Italy’s anti-establishment Five-Star Movement and the far-right League have agreed a deal to form a government coalition that would bring together two parties that both want to challenge European Union limits on government borrowing and spending, whilst making an aggressive crackdown on immigration. After the announcement, Italian 10-year bonds hit their weakest level since last October and equity markets dipped amid heavy trading volumes.

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