Before the bell: Trump adds fuel to the fire

High oil prices, war rhetoric and rising interest rates trigger a sell-off in equities and gold.

Stock markets recorded their third, and in some cases even their fourth consecutive week of deep losses last week. The war in the Middle East continues to set the negative direction, mainly through sharply higher oil prices and interest rates. Until Donald Trump suddenly stated on Friday evening that the war would not last much longer. A day later, however, he issued an ultimatum: “If Iran does not reopen the Strait of Hormuz within 48 hours, we will destroy Iran’s utilities.” Observers fear that oil prices could climb much further. The Euro Stoxx 50 lost 3.8% last week and the S&P 500 1.9%. Both Europe and Wall Street are now trading 5% below the start of the year. The most frequently cited explanation for last week’s negative sentiment is higher interest rates. Short-term rates in Europe in particular are rising sharply, as investors expect the ECB to raise rates twice in quick succession. That is not a given, however, as high oil prices could slow economic growth. On Friday, even the biggest market heavyweights faced selling pressure. Nvidia (-3.1%), Alphabet (-2%), Meta (-2%) and Microsoft (-1.8%) no longer appear to be safe havens. In Brussels, losses were uneven: Financière de Tubize fell 3.5%, Ageas lost 2.1% and Sofina declined 2.5%.

Asian markets are down more than 3% across the board this morning. The results calendar remains relatively quiet this week. Sofina will publish its final annual results on Thursday after the close. Investors will also focus on US job data and business activity indicators in both the United States and Europe.

An extra fuse on the oil barrel

Trump will never win an award for consistency, but this time he is taking it to another level. First, he claimed the attack on Iran would be wound down quickly. Less than 24 hours later, he threatened to destroy Iran’s utilities if the Strait of Hormuz is not reopened within 48 hours. One energy analyst warns of a rapid further surge in oil prices “due to this new ticking time bomb.” Iran responded that it would then target oil, gas and desalination facilities in the Gulf states. Many regions in desert environments depend on desalinated seawater for fresh water. Without it, parts of the region would become uninhabitable within weeks. More than oil prices above 110 dollar per barrel, financial markets dislike the uncertainty and chaos created by Trump II.

Gold drops further towards 4,000 dollar

Many people struggle to understand why gold fell 9% last week, one of the sharpest weekly declines in many years. This morning, the precious metal is dropping another 7%. There is indeed a war in the Middle East, and the rapid rise in oil and gas prices will push inflation higher. But gold is still nearly 50% higher than a year ago and costs twice as much as two years ago. That makes any excuse sufficient to lock in profits and move into cash. The trigger came from the sharp rise in interest rates, which makes holding gold—an asset that yields nothing—relatively more expensive. Higher rates also make equities somewhat less attractive, although that too is relative. But if you need an excuse, it certainly helps. Gold is primarily useful as a (small) diversification tool within a portfolio; speculation may or may not pay off in the short term.

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