Markets thrown off course by fresh conflict

Key takeaways

After a spell of positive thinking, markets abruptly retreated, responding to a new spate of conflict in the Middle East.

US-China solutions were welcomed, then overshadowed
For two days in London last week, intense trade negotiations took place between the US and China. The talks appeared to have gone well, with President Trump hailing a deal which would see China provide US companies with the ‘rare earth’ and magnet supplies critical to making tech products. Meanwhile, the US would step back from threats to revoke Chinese students’ visas. Other public details about the deal were limited, but markets were pleased to see some progress. Stock market prices rose accordingly in first part of the week, but the cheerful mood among investors did not last…

Fresh conflict in the Middle East raised practical concerns for investors
The outbreak of fresh conflict between Israel and Iran created international alarm, and civilian casualties are tragically rising. But while the humanitarian aspect of violent conflict is naturally the world’s first concern, for financial markets in this instance, there are also practical considerations surrounding the supply and price of oil. So far in 2025, the oil price has been relatively weak, but prices have rocketed higher in recent days. This reflects fears that Israeli attacks on Iran’s energy infrastructure could lower the production of oil, reducing the overall global supply. We would note that while geopolitics can certainly impact financial markets in the near term, history suggests that the market recovery – quite unlike the human recovery – is usually relatively swift.

Economic news supports further US and UK interest rate cuts
Behind the noise of international conflict, the latest economic data continued to be released as usual. Inflation appeared to be slowing down in the US, with figures indicating that pricing pressures had weakened by more than anticipated in May. (As a reminder, lower inflation does not mean that prices are falling, but that prices are rising more slowly than before.) Lower inflation could allow leading policymakers at the US central bank to cut interest rates later this year, but no changes are expected at their meeting later this week. Meanwhile in the UK, official figures suggest that employment markets are weakening, but the Bank of England is also expected to watch and wait for a little longer before making any cuts to interest rates.

Market moves

• Against a backdrop of heightened conflict in the Middle East, the price of gold – a traditional investor ‘safe haven’ – rose again. The prices of other typically defensive assets, like UK government bonds, also rose, as did the price of oil.

• Share prices, which had risen earlier in the week, faltered in response to the Israel-Iran turmoil.

What to look out for this week

• Central banks in the UK and US (among others) have important policy-setting meetings later this week. Decisionmakers are expected to hold interest rates at their current levels for the time being.

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