Market snapshot: investors exit ahead of Trump's Iran deadline

The trickle is running the risk of becoming a flood as it becomes increasingly evident that the short conflict which investors had been pricing in remains totally elusive.

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Investors are running out of hiding places, with equities surrendering strong early-year gains, yields spiking higher and even gold suffering a 7% decline given its inverse relationship with the dollar. Indeed, the strength of the dollar has negative implications for debt denominated in the currency – of particular interest to many Asian countries – while the oil price spike is not only inflationary but threatens to choke business investment and consumer confidence.

The newsflow has offered little to no solace, as reports of preparations being made for US troops on the ground in Iran heightened concerns. Iraq declared force majeure on all oilfields run by foreign companies, while there are reportedly already global shortages of fertiliser, bunker fuel for ships and jet fuel.

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Further escalation appeared over the weekend as the US President warned that Iran’s power plants would be obliterated unless the Strait of Hormuz was fully opened within 48 hours, with the Iranian response promising to target US and Israeli energy and infrastructure assets in the region. With the inflationary impact of the oil price yet to find a ceiling, the potential for lower interest rates has all but been priced out and the smaller cap Russell 2000 index in the US was the worst hit as a result, dropping by more than 2% on Friday given the implication of higher for longer rates on smaller companies who need to borrow to grow.

The main US indices limped to a poor end to the week and, in the year to date, the Dow Jones is now down by 5.2%, the benchmark S&P500 by 5% and the Nasdaq by 6.9%, given its growth focus. Nor has the weakness ended there, with Dow futures pointing to further losses of up to 1.2% for the three indices when the US market opens later. 

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With Asian markets sliding overnight given that many countries in the continent are net energy importers, let alone the implications of a stronger dollar on debt, the UK market was drawn into the risk-off environment once more.

Indeed, having been a beacon of light amid the turmoil, the FTSE100 has now turned negative for the year and is now 1,130 points, or 10% lower than the record high set as recently as at the end of February, dragging it technically into correction territory. It also places the main index down by 1.6% in the year to date. Any strength in the oil majors has been insufficient to offset losses elsewhere, while even the strength of the dollar – traditionally a boon to an index packed with companies exposed to overseas earnings – has been swept aside.

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Losses in early trade were almost universal among the primary index constituents, with the likes of Fresnillo (LSE:FRES) and Endeavour Mining (LSE:EDV) topping the loser board, with losses of around 5% in reaction to the gold price decline. 

Other sectors which had offered some resistance previously were also overrun, including but not limited to the miners and defence, with limited losses to be seen only among the most defensive of stocks, alongside the banks which could benefit from higher for longer rates, even if the possibility of customer loan defaults increases given the wider backdrop.