Share prices in the US, Europe and Asia fell as the oil price jumped past $90 a barrel, amid growing fears grow of a direct conflict between Israel and regional rival Iran over Gaza. If the oil price continues to climb many now fear it could trigger a second wave of inflation, just as we thought the cost-of-living crisis was drawing to a close.
Crude oil is up almost 20 percent so far this year and may climb higher still as fears of a wider Middle-East conflict intensify, according to Joshua Mahony, chief market analyst at Scope Markets.
He said the “downbeat” mood was aggravated by fears that the US Federal Reserve was now less likely to cut interest rates as the country’s economy continues to run red hot. “Markets continue to price a June rate cut but those expectations are gradually fading.”
Investors are desperate for that first interest rate cut, as they believe this would light the blue touch paper under a global stock market recovery.
Lower interest rates would ease the pressure on mortgage borrowers, put more money into consumers’ pockets, and boost business profits.
Investors started the year expecting up to six interest rate cuts, now there is a serious danger that we may get none at all.
Global shares sold off as “storm clouds circled equity markets” as a result, said AJ Bell investment director Russ Mould. “Wall Street was not in a good mood on Thursday night and that spread to Europe on Friday morning.”
The FTSE 100 fell one percent in early trading to 7,893, with 97 out of 100 companies in the red. “The only ones in positive territory were weapons maker BAE Systems and energy companies Centrica and Shell,” Mould said.
London’s blue-chip index ended the day down 0.92 percent overall to close at 7,902.88.
Investors have been further spooked by comments from US Federal Reserve official Neel Kashkari, who questioned whether the American central bank needed to cut rates at all this year with “inflation moving sideways”.
Kashkari had previously pencilled in two rate cuts and Mould said: “Investors don’t want to hear such comments but they aren’t blind to what’s going on.”
Mould warned the stock market could “wobble” if the Fed decides against cutting rates in June. “It’s enjoyed quite a run since last October and a shift in the narrative could cause investors to lock in some of those gains.”
George Lagarias, chief economist at Mazars, said the US economy was “firing on all cylinders”, all but destroying rate cut hopes.
“The US Federal Reserve had already been apprehensive about cutting rates in the summer, and a stronger economy certainly does not make the case for monetary easing.”
Lagarias said he now expects “the first rate cut to be postponed into the latter part of the year”.
Others are even more pessimistic. I warned yesterday that we may not get any interest rate cuts this year. Now that nightmare scenario for mortgage borrowers looks even more likely.
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Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said global stock markets are suffering from a “widespread mood problem” and the oil price rebound isn’t helping. “It’s unclear when this will smooth out.”
Yesterday’s negativity was compounded by news that UK house prices fell one percent in March, according to Halifax.
Halifax director of mortgages Kim Kinnaird said a fall after five consecutive months of growth was “not entirely unexpected”, but warned buyers were struggling as mortgage rates picked up.
“With only a modest improvement in affordability on the horizon, this will likely limit the scope for significant house price increases this year.”
In yet another sign of how worried investors are, the gold price has flown to a record high of almost $2,300 an ounce.
Gold is the ultimate safe haven in times of trouble. Right now, investors cannot buy enough of it. The fear factor is higher than ever.
