22/06/26: Iran deal, central banks & Starmer resignation

[00:00:00] Rory: Good morning. Today's Monday the 22nd of June. It seems summer is here again. Joining me today once again is Andrew Shaw. Andrew is one of our Senior Investment Analysts on the team. Andrew, first things first, good morning.

[00:00:14] Andrew: Morning, Rory

[00:00:16] Rory: Another busy week. Three things to focus on this morning.

[00:00:19] Rory: The dominant story remains Iran. The memorandum of understanding was signed last week. Then we had two central bank meetings that fit together rather neatly, the Federal Reserve on Wednesday, which was Kevin Warsh's first as chair, and the Bank of England here at home on Thursday alongside our UK inflation data. also had the news this morning that Minister Kier Starmer will be resigning. But before we get into that, Andrew, how did markets get on last week?

[00:00:46] Andrew: It was a positive week last week, Rory. For most of the week, the combination of the Fed holding steady and optimism around Iran signing gave markets a real lift. But Friday's flare-up in Lebanon took a good deal of the shine off.

[00:01:00] Andrew: The S&P 500 still finished up around 1% on the week. Now up 9.5% for the year. Japan was the standout again, with the Nikkei up 7%. Europe had been having a very strong week on the energy relief story, but gave back a big chunk of it on Friday, finishing up around 1.5%. The UK was actually down 1% for the week, and the big mover, as ever, was oil.

[00:01:26] Andrew: Brent had drifted down towards $80 midweek on the deal. That's about a 30% fall from the highs at the end of April.

[00:01:34] Rory: Okay, so I think the major news for us was the US Iran development with that deal signed on Wednesday. We had further talks that kind of got going over the weekend, particularly over Sunday night and into Monday morning. Andrew let's start in Iran therefore. What is the latest there?

[00:01:52] Andrew: Yeah, as expected, the breakthrough came midweek. The memorandum of understanding was actually signed on Wednesday, which is a couple of days earlier than the planned Friday ceremony in Geneva. President Trump signed it at Versailles near Paris while he was in France for the G7, and the Iranian side signed electronically with Iran confirming it had come into effect.

[00:02:14] Rory: What's actually in that MOU?

[00:02:18] Andrew: It's a 14-point framework. The headline points, a permanent ceasefire on all fronts, explicitly including Lebanon, the reopening of the Strait of Hormuz, a drawdown of US military assets from the region, some sanctions relief and the release of frozen Iranian funds, and a US commitment to help fund Iran's reconstruction.

[00:02:41] Andrew: Crucially, though, it's not the final deal. It starts a 60-day clock for negotiating that with Iran's nuclear program and its stockpile of enriched uranium being the hardest issues left to resolve.

[00:02:54] Rory: So it seems like we had a genuine breakthrough with that deal being signed last week, and clearly the next stage is the discussions on the nuclear programme. Both sides are quite far apart at the moment, so we are watching those developments quite carefully. But we did get some positive news on, on, on the start of those talks first thing this morning. Moving on, to central banks meetings last week. Let's start over the pond with the Fed, Andrew. Kevin Warsh's debut in the chair. How did he get on?

[00:03:21] Andrew: The decision itself was expected, so no change in rates. Rates were held in the range of 3.5 to 3.75%, which is the fourth hold in the row for the Fed, and that was a unanimous vote. But this was Kevin Warsh's first meeting as chair, having taken over from Jerome Powell in May, and the interest was all in how he'd run things, and he made a real statement.

[00:03:45] Rory: In what way was that then?

[00:03:47] Andrew: A few things. First, he signaled the next move is m-now more likely to be a hike than a cut, and the Fed's own projections, the dot plot, now show the median policymaker expecting rates to end the year at 3.8%, and that's up from the projection of 3.4% back in March.

[00:04:04] Andrew: So at least one hike is on the table this year. And second, and this is the big stylistic shift, he scrapped the forward guidance entirely. He said it wasn't well-suited to the current environment. And that's a deviation from what Jerome Powell used to do, who he went out of his way to telegraph the Fed's intentions.

[00:04:23] Andrew: And third, it's a sweeping review of how the Fed operates. Five task forces looking at everything from how it communicates to the balance sheet. He talked about a regime change, and he clearly means it.

[00:04:36] Rory: And markets wobbled a little bit, on that news midweek. Markets caught off guard a little bit by the fact that, we might get a rate hike now this year. So that was clearly negative for equities, but the markets did recover into weekend on the Iran deal signing. Closer to home, the Bank of England told a similar story the next day, Andrew. And could you also maybe touch on the UK data that came in?

[00:04:59] Andrew: Yeah, the two events back to back. First on Wednesday we had main inflation data and on the headline it was actually a bit better than feared. CPI came in at 2.8% year on year, which was unchanged from April and below the 3% that the market had expected.

[00:05:15] Rory: Okay. So at the headline level, pretty decent number coming in below expectations, but under the surface, anything to highlight?

[00:05:22] Andrew: Yeah there is. It's service inflation. The number jumped to 3.7%, and that's up from 3.2%. And because it's driven by domestic costs and wages rather than global energy, it tends to be a little bit stickier. So beneath the reassuring headline, the underlying picture is a little bit more uncomfortable.

[00:05:40] Rory: I suppose that probably fed straight into the bank's decision then on Thursday.

[00:05:45] Andrew: It did. The bank held the rate at 3.75%, but the vote was a hawkish one with seven to two. Two members actually wanted to hike to 4%. So much like the Fed, you've got a central bank holding, but with a hawkish tilt and dissenters pointing to a higher rate.

[00:06:03] Rory: So you've got a common thread really across all three of those topics. The Iran deal really the swing factor. It's what's driving energy prices down, and that energy relief is exactly what both the Fed and the Bank of England need to see for inflation to come back to target and hopefully rates to come down. So Andrew, finishing off, what should our listeners be looking out for this week?

[00:06:24] Andrew: Iran, first and foremost, specifically whether those nuclear talks can actually get going and whether the Lebanon situation is contained or escalates, and that's the swing factor for oil and sentiment. We'll also be watching the Strait, how quickly tankers start to get moving and whether news coming out over the weekend that it was shut again actually feeds through.

[00:06:46] Andrew: Who knows? Different sides are telling different stories at this point. On the data side, flash PMIs across the US, UK, and Europe give an early read on June business activity, and there is a second estimate of US first quarter GDP, but really it's all about Iran this week.

[00:07:03] Rory: Yes a lot's going on. We'll also keep an eye on the political situation here in the UK, what the ramifications of that is across markets, and we'll update you on that next week. Thanks for joining, Andrew. To our listeners, please reach out if you have any questions. Stay out the heat, and wishing you all a great week ahead.