The selloff in Asia spilt over into the European session with bourses across Europe on the back foot on Monday. Investors are treading cautiously as they wait to see how tensions between Iran and US play out. Whilst the two sides exchange threats investors aren’t leaving much to chance. Flows into safe havens such as the Japanese yen, gold and Swiss franc are on the up, which riskier assets such as equities are out of favour.
Oil Extends Gains
Oil rallied over 3% on Friday and is extending those gains across Monday’s session. Brent has pierced $70 per barrel whilst WTI reached $64.72, its highest level since April last year. The overriding fear is that a widening Middle Eastern conflict could easily disrupt oil supplies. To put into context, the region accounts for around half of the world’s oil production, whilst the Strait of Hormuz sees around 20% of global oil shipments past through its waters. Add into the equation Trump’s threats to impose sanctions on Iraq, the second largest producer in OPEC and its not inconceivable to see oil push higher at the slightest sign of further tensions.
As oil pushed to mutli-month highs oil majors have naturally been in demand. BP has jumped to the top of the FTSE leader board, up 2.5%, extending Friday’s gains. BP’s upstream earnings are directly impacted by the price of oil. The higher oil push, the further we can expect BP to gain.
The FTSE showed more resilience than other European bourses dropping 0.6% against its German counterpart’s 1% decline. This is in part thanks to rallying heavy weight oil majors, meanwhile the stronger pound was offering no support.
Pound Rallis On Stronger Service Sector
The pound has pushed back through $1.3150 following better than forecast service sector PMI. The final UK service sector pmi beat expectations with 50 points, up from 49.3 in November. A decisive general election result and some clarity over Brexit booted business optimism at the end of 2019. New orders are up and we should start to see an improvement in business conditions over the coming months. However, let’s not forget that questions over the ability of UK and EU to reach a trade agreement within the year are still likely to drag on business investment decisions across the year. The UK is by no means out of the woods, but if Boris Johnson and co play their cards right we could start to see a slow turnaround. The data comes following dismal construction and manufacturing pmi’s late last week.
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