The S&P 500 is struggling to rally despite lower oil prices, it seems investors are concerned about a potential escalation in the war with Iran this weekend. The FTSE 100 is rallying but it has yet to reach the first resistance area above the 55-period moving average. UK core CPI came in higher than expected at 3.2% yet the FTSE 100 rallied on the news. The FTSE is strong probably because some sectors like banks and oil perform well in the current environment.
As inflation is likely to rise, interest rates in the UK are likely to rise too. Banks love higher interest rates because they can increase their “net interest margins” (the difference between what they charge on loans and pay on deposits). Oil is supported by the war, banks and oil companies play a big part in the FTSE 100 performance, that is why the FTSE is strong, Inflation is likely to rise in the US too, yesterday US import prices came in higher than expected at 1.3% (forecast 0.6%).
I think Trump will not be happy with a long lasting war with Iran, the economic “clock” is ticking for the Trump administration. The relationship between the duration of the conflict in Iran and U.S. inflation is direct and significant. The biggest fear for the White House is stagflation—a scenario where the war causes prices to rise while simultaneously slowing down global growth. We are in a midterm election year, and the Trump administration is acutely aware that “affordability” is the number one issue for the electorate. Therefore Trump will end the war, the question is when? This matters because the market will surge the day the war is over.