Market snapshot: risk-off for investors, but risk-on for Entain

There are no signs of respite in the conflict between Israel and Iran, with investors hunkering down in response.

Quite apart from the tragic human costs, there are factors at play which have added to what was already an investment landscape full to the brim with challenges. The oil price, which initially spiked by more than 7%, could have an almost immediate impact on inflation at a time when rising prices are coming to the fore as a result of the tariff introductions. That being said, for the moment this impact is more limited as the oil price is now breaking even for the year, even after the recent spike. In addition, the immediate concerns around a possible choking of supply via the Strait of Hormuz was partly offset by the possibility of Saudi Arabia and OPEC more generally turning on the taps if necessary.

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Nonetheless, US markets responded negatively to the fresh geopolitical tensions, having already closed on Thursday as the news broke. Oil majors understandably surged along with defence companies, while the mega-cap technology sector gave up some of its recent recovery as investors moved to risk-off mode. Travel companies, meanwhile, suffered the double whammy of potentially higher fuel costs alongside a likely slowdown of tourist travel anywhere in the region.

The conflict overshadowed the fact that a survey revealed that consumer sentiment in the US improved for the first time in six months, perhaps partially as a result of the President’s decision to pause on certain tariffs, which could delay the inflationary follow through. The survey reading was well ahead of estimates and at least provided some relief given the importance to the domestic economy of consumer spending, which is estimated to account for more than two-thirds of growth.

The Federal Reserve’s interest rate decision has also been made easier following the spike in the oil price and its potential impact on inflation. Markets had already priced in a near unanimous verdict that rates would be unchanged, given other overhangs such as the lingering tariff levels on China, and the latest news will lessen the pressure further for the Fed to react at all. Its accompanying comments, however, will give further to colour to its current view of the economic backdrop.

Skittish sentiment left each of the main indices in the red at the end of the week, which erased the recent Dow Jones swing back into positive territory. The index is now down by 0.8% in the year to date, with the Nasdaq clinging on to a fragile gain of 0.5%, with the benchmark S&P 500 ahead by 1.6% and therefore showing some signs of resilience.

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Asian markets were mixed overnight with investors remaining cautious. Despite the fact that the region is seen as less affected by the latest conflict outbreak, the escalation nonetheless does little to improve the mood. This offset some surprisingly positive news from China, where consumer spending rose by more than 6% year-on-year, as compared to 5.1% in April and comfortably ahead of 5% expectations. Industrial production also expanded by 5.8%, although this was a marginal miss on estimates and behind the 6.1% of the previous month. The economy remains on something of a knife-edge given that any signs of a tentative economic recovery were quickly derailed by tariff developments, even though this story has much further to run.

The Bank of England will be delivering its latest interest rate decision later this week in addition to the Fed, as indeed will the Bank of Japan, where a hat-trick of no change announcements is expected. For the Bank of England, there is likely to be some reference to the inflationary potential of the rising oil price, although this will play second fiddle to a labour market which is showing some signs of softening. In turn, this could lessen pressure on wage growth inflation, although the central bank’s currently measured and cautious approach is likely to leave their stance on monetary policy unaltered for the time being.

The FTSE 100 opened defiantly, with Chinese exposure coming to the fore and propelling the likes of the mining stocks, Prudential (LSE:PRU) and Standard Chartered (LSE:STAN). The strength of the oil price underpinned further gains for the oil majors, leaving the index up by 8.6% so far this year, albeit a slither away from last week’s record closing high.

The star performer in early trade was Entain (LSE:ENT), whose gamble to conquer overseas markets in addition to its core UK offering is showing signs of paying off, with potentially the largest target of all exhibiting particular promise. Its joint venture with BetMGM has recently become earnings positive, although it has been a tough slog for the group to get to this stage, where promotional investment has been something of a necessary headwind. Recently strong momentum resulted in the announcement of an upgrade to expected revenue and earnings for the current quarter, lifting the shares by more than 7% and now by more than 20% over the last year.