Footsie falls as stagflation fears rear up

Susannah Streeter, chief investment strategist at Wealth Club, highlights the growing stagflation fears weighing on markets as the conflict with Iran keeps energy prices elevated and adds to uncertainty over growth, inflation and interest rates.

Susannah Streeter, chief investment strategist, Wealth Club:

“Stagflation fears are stalking financial markets as the war with Iran looks increasingly intractable and high energy prices look set to be the burden to bear for the global economy. London’s Footsie has scuttled lower in early trade as worries reverberate about the impact of the conflict. Banks are leading the descent, with Barclays, Lloyds and NatWest sinking into the red. Higher inflation and a stagnating economy are increasing the risk of loan defaults and weaker borrowing demand, which look set to eat into profitability.

A glass-half-empty attitude is swirling this morning for the FTSE 100, as concerns about the tense situation in Iran collide with worries about political upheaval in the UK. Far from managing to shore up support, Prime Minister Keir Starmer’s position looks increasingly shaky, and this is feeding through into fresh bond market jitters. With cabinet ministers now joining the throngs of MPs calling for him to step down, instability is back at the heart of British politics.

This clouds the outlook for the financial management of the economy, and gilt investors are reacting, with prices falling and yields rising, an indication they want a higher return to compensate for the increased risk of taking on UK debt. But it’s not solely domestic politics piling on the pressure. Inflationary worries are rising again, given the latest setback for a resolution to the war with Iran.

Energy prices are marching higher again, with Brent crude back up above $106 a barrel. Nerves are frayed once more, with worries rising that a resumption of strikes on Iran could be on the cards after President Donald Trump said the US-Iran ceasefire was on “massive life support”. Both sides have dismissed each other’s proposals and there are fears the stalemate could escalate again. It’s becoming clear that higher energy prices are here to stay for many months, potentially into next year. Even if the chokehold on the Strait of Hormuz is released, bruised supply chains and broken energy infrastructure will take many months, if not years, to heal.

So, nations are settling in for the long haul and some of the contingency measures already brought in are helping ease immediate crises. There’s been a 10.1% drop in the IATA jet fuel benchmark for the week ending 1 May, indicating that some of the immediate market fears around supply disruption may be easing, at least for now.

The closure of the Strait of Hormuz triggered emergency plans, with European and UK refineries switching to ‘max jet mode’, prioritising fuel production for the airline industry over other refined products. This, in addition to increased shipments from the US Gulf Coast and exporters such as Nigeria, is easing worries of an immediate fuel shortage crisis. This should reassure travellers holding off on booking, fearful of waves of cancellations. However, prices still remain around 60% higher than before the conflict began, which will continue to keep airlines under intense cost pressures.

The British Retail Consortium’s latest update on high street health hasn’t provided much cheer. The snapshot indicates April was an anxious time for shoppers. Although the timing of Easter was partly behind the 3.4% fall in sales for the month compared to a year earlier, a drop in consumer confidence was also to blame. It’s not surprising that consumers are holding off making major purchases given that household bills are rising and the outlook looks so uncertain. A recent rebound in furniture sales is fizzling out and the reluctance to spend doesn’t bode well for retailers hoping to shift homewares, with M&S shares down in early trade.

Greggs the baker has served up a more appetising set of numbers, turning patchy sales into a well-baked performance. Like-for-like sales rose 3.3% in the last 10 weeks, as healthier additions to the menu, like chicken rolls and salads, proved appealing. It’s no longer relying solely on sweet treats and sausage rolls to lure in customers but is serving up dishes for a more health-conscious crowd. There have been worries that the popularity of obesity drugs would become a longer-term problem for Greggs, but it has a track record of being nimble with menu choices to meet changing tastes, and it’s delivered once again.

However, given the heat needed for its in-store ovens, it will be far from immune to the surge in energy costs. Although cost inflation is expected to be a manageable 3% this year, which has reassured investors, it’s still cautious about what could lie ahead if the conflict continues for much longer. Nevertheless, the steadier pace of sales growth has reassured investors, with shares rising nicely in early trade.”