This week in the markets: investors stay calm despite rising tension

Markets are unemotional. They unsentimentally assess risks and probabilities. And their conclusion at the start of this week is that Israel and Iran have concluded their disagreement - for now.

Weighing the odds

Investors need to develop detachment. This weekend’s events have been a case in point, with the markets largely seeming to have shrugged off an apparently worrying escalation in Middle East tensions.

While equity markets have pulled back from their high point at the start of the month, they remain pretty sanguine. After the near 30% rise since last October’s low, it would have been surprising if the stand-off between Israel and Iran had not given investors pause for thought. The S&P 500 is roughly 2.5% below its April 1 high.

Other assets have meanwhile lived up to their safe haven reputation. Gold, in particular, hit $2,400 an ounce last week, a new all-time high as geo-political tensions mixed with persistent inflation in the US, to make the case for the precious metal again. The most bullish forecasters are now suggesting a rise to $4,000.

Oil is also on the up, rising to $90 a barrel from a low in December of under $75 as events in the Middle East have focused attention on an already tight market in which rising demand is bumping up against constrained supply from Organization of Petroleum Exporting Countries.

A third asset that tends to do well in uncertain times is the US dollar. Last week was the strongest for the US currency since 2022. It now costs only $1.06 for an American to buy a euro and $1.26 to purchase a pound. Appetite for the dollar is also a product of a growing belief that the US Federal Reserve is likely to be last out of the blocks in the pivot to lower interest rates. The strong US economy means there is less need for cheaper borrowing costs than in Europe where households and businesses are struggling more.

At the start of the year, markets were looking for six interest rate cuts from the Fed this year, twice as many as the central bank itself was suggesting. Now the futures contracts are pointing to fewer cuts than the Fed is hoping for. Perhaps just one or two in 2024. The European Central Bank, by contrast, signalled last week that it is ready to cut rates as soon as June.

Earnings focus

Meanwhile, back at the coal face of company results announcements, its earnings season again. This week the first quarter results start to flow, with the US banks as usual the first to unveil their numbers. Goldman Sachs, Bank of America and Morgan Stanley will all report this week.

The good news is that a strong US economy is feeding through into a positive outlook for company earnings. Growth is expected to improve incrementally through 2024, until by the end of the year we are looking at double digit earnings increases.

That will help to rein in the currently stretched valuations of US shares, now trading at more than 20 times expected earnings. Fortunately, price to earnings multiples are lower in the rest of the world, little more than half as expensive in the UK and in the mid-teens in Japan.

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