After a period of positive sentiment that helped markets to recover, signs that peace talks between Iran and the US could take longer than expected caused a slight dip in risky assets at the start of Thursday’s trading. Although the war in Iran is becoming a secondary concern for investors, negative headlines that suggest that the end of the conflict is not imminent can still move price action.
Overall, the backdrop for markets is positive due to a troika of recent good news. The ceasefire is still holding in the Middle East, UK GDP data surprised on the upside just before the war started, and the S&P 500 made a fresh record high on Wednesday. This is pushing down volatility and helping global stocks to recover. The MSCI world index has notched its 10th straight day of gains, however, European indices pulled back slightly on news from Pakistan that there is no date currently scheduled for fresh talks between the US and Iran. This has pushed up the price of oil, and Brent is back above $96 after rising 1.5% on this news.
So far, the news that further talks have not been arranged is only having a moderate impact on financial markets. European stocks are still in positive territory, and the oil price remains below $100 a barrel, which is a psychologically important level for investors. However, until the Strait of Hormuz is fully operational, the oil price and the price of many commodities will continue to trade at a significant premium, especially in the physical market.
There are longer term factors that could support investor sentiment towards stocks, including central bankers who are out in force this week at the IMF spring meetings. There have been a plethora of central bank speakers in the last 24 hours, including BOE governor Andrew Bailey. He pushed back on market expectations for rate hikes from the BOE this year, and adopted a wait and see approach, which supports the BOE remaining on hold when they meet later this month. This is helping to lower bond yields this week. Even arch hawk Megan Greene sounded pragmatic about the inflation outlook, saying that the economy is in a vastly different place compared to 2022.
UK GDP upside surprise won’t last long
The UK’s GDP upside surprise for February suggests that the economy was on a stronger footing heading into this war. GDP rose 0.5% in February and by 0.5% in the three months to February. If this was consistent, the UK could be looking at a 2% annual growth rate. However, February data looks extremely out of date right now, and the UK economy is likely to take a hit from rising energy costs and tumbling consumer confidence, and we doubt that February’s robust performance will be repeated in March. GBP had initially popped on this news, however, it has now given up these gains as the dollar strengthens more broadly on the back of the news about the talks between Iran and the US, which is a reminder that diplomatic efforts are a process and it will take some time to end this war.
Tech stock rally to continue, as Allbirds switch to AI
Although the news about the talks could knock sentiment towards stocks on the margin, we continue to think that the rally in tech stocks can sustain US indices for the medium term unless the situation in the Middle East seriously deteriorates from here. Allbirds, a struggling US shoe brand, saw its share price surge over 500% on Wednesday, after it made an unexpected pivot into data centres. It has made a $70mn investment in data centres and will provide compute for companies looking to boost their AI capabilities. Allbirds was by far the top performing US stock on Wednesday, but how does a shoe company switch to an AI company? Its actual investment is tiny compared to how much the likes of Meta, Microsoft and Google spend on data centres, so what does it represent? Is this a sign that the AI theme is back, or is it peak AI?
Today’s price action in the US is worth watching. Tesla, Microsoft, Uber and Oracle were the top performing stocks on Wednesday as tech continues to dominate. Can they continue to rally if markets are concerned about the speed of talks between the US and Iran, or if people think the Allbirds news is the sign of a bubble.
Ahead today, Netflix results will also be watched closely to see what their plans are after pulling out of the race to buy Paramount. More central banks will be watched closely, and further news flow from the Middle East is also worth watching.
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