Escalating Tension in the Middle East Clouds Outlook

A week that began with some optimism surrounding US-China trade relations ended with the outbreak of hostilities in the Middle East. Let’s recap last week’s events in more detail and look at what to expect from the week ahead.

US-China Trade Truce Restored

Last week began with the US and China entering talks in London aimed at restoring a trade truce.

The original truce had been agreed a month previously in Geneva, with both sides pledging to roll back sky high tariffs on the other’s exports. However, the agreement broke down as both Washington and Beijing accused each other of not upholding their end of the deal.

The talks in London, which lasted for two days, ended with representatives from both countries reportedly finding a way to re-agree the terms which they had agreed to a month before. US President Donald Trump took to social media on Wednesday to state that the “deal with China is done”.

Whilst the full details of what was agreed have not been released, President Trump noted that China will resume exports of rare earth metals, and the US will continue to allow Chinese students to study at US colleges and universities.

This announcement was followed on Thursday by better-than-expected inflation data in the US. Annual headline inflation rose to 2.4% in May, up from 2.3% in the previous month, but lower than the 2.5% which had been forecast by analysts.

Conflict in the Middle East

However, on Friday, markets were shocked by the outbreak of conflict in the Middle East, as Iran and Israel exchanged military strikes.

The S&P 500, Nasdaq Composite and Dow Jones fell by 1.13%, 1.30% and 1.79% respectively. Gold, on the other hand, rose 1.48%, as investors flocked to the safe haven asset.

Concerns that a conflict could disrupt global energy supplies pushed oil prices higher. Global benchmark Brent crude closed more than 7% higher, after jumping more than 13% during the session.

However, investor concerns appeared to ease on Monday amidst hope that a ceasefire was on the horizon.

The S&P 500, Nasdaq and Dow Jones rose by 0.95%, 1,52% and 0.75% respectively. Meanwhile, gold prices dropped 0.87% and Brent crude, which had opened sharply higher, ended Monday’s session 1.35% lower than Friday’s close.

Nevertheless, on Tuesday morning, US stock index futures are trading lower, and oil prices rose again after President Trump announced on social media that “everyone should immediately evacuate Tehran”.

What to Look Out for This Week

Looking ahead, there are a number of important economic announcements for traders and investors to keep an eye on this week.

Inflation Data

On Wednesday, the UK and the euro area are both due to release inflation data for May.

UK annual headline inflation is expected to fall to 3.3%, down from 3.5% in April. In the euro area, annual headline inflation is anticipated to remain unchanged from the previous month at 1.9%.

Interest Rate Decisions

On Wednesday, the Federal Reserve will announce its latest interest rate decision, with the Bank of England (BoE) making a similar announcement on Thursday.

Both central banks are expected to keep interest rates steady amidst ongoing uncertainty surrounding the conflict in the Middle East and President Trump’s trade war.

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