Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Today, we’re looking at the Israel-Iran conflict, the euro as a global currency, and the BoE’s budget squeeze.

But first, our number of the week…

8%

That’s what households expect inflation to be over the next 12 months according to a recent global survey from the Bank for International Settlements. In comparison, current global inflation levels average just 2.4%.

Sidekick Takeaway: The BIS results show how the post-Covid inflation shock has increased long-run inflation expectations, even as price pressures have moderated. Central banks will face a challenge in attempting to rein in inflation expectations, especially as trade and geopolitics threaten a new round of price increases.

Now to our main stories…

Only have a minute to read? Here’s the TL;DR:

• The long-running Israel-Iran conflict spilled into the open over the past week with surprise Israeli air strikes. Oil soared to $78 a barrel on Thursday, with the potential for further increases if shipping through the Strait of Hormuz is disrupted.
• In an op-ed this week, ECB President Christine Lagarde endorsed the idea of the euro as global reserve currency. While the dollar has traditionally dominated international markets, its crown has slipped in recent years, creating the opportunity for alternatives.
• With total expenses climbing 20% since 2019, the Bank of England is facing increased funding pressures, failing to remit a dividend to the Treasury for the fifth straight year. This squeeze could cause issues for the bank’s efforts to modernise its policymaking.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

‍

Priming the Pump: Israel-Iran Conflict Drives Oil Higher

Israel and Iran have been engaged in a low-level conflict for decades, supporting opposing militias and engaging in irregular attacks.

But last week, this conflict spilled into open warfare. Israeli air strikes on Iran’s capital were quickly met with a retaliatory missile barrage. 

With the US reportedly considering conducting its own strikes against Iran, the conflict could be set to escalate dramatically.

But for investors, the impacts are already spreading to financial markets. 

Oil’s rise challenges the consumer outlook

Oil traded at just $60 a barrel at the start of June. Following Israel’s attack, that figure climbed to $78 on Thursday.

Iran is one of the world’s largest oil producers, accounting for roughly 4% of global production. 

A far more significant risk, however, is shipping disruptions in the Strait of Hormuz:

• The Strait of Hormuz is a vital shipping chokepoint situated between Iran and the Gulf States.
• The Strait is one of the world’s most important shipping lanes for oil, with approximately 20% of global consumption (or 20 million barrels) passing through the Strait each day.
• According to JPMorgan analysts, a shutdown of the Strait could see oil climbing to $120 a barrel or higher.

Petrol prices are closely tied to oil prices on the international market. An expanded conflict could lead to much higher prices for consumers. 

Moreover, oil spikes tend to feed into other prices through shipping & transport costs. This could make balancing inflation risks trickier for central banks.

Sidekick Takeaway: One silver lining is that global oil supply has become much more diversified over the past decade, with the US and Canada alone producing nearly a third of the world’s oil. In fact, the International Energy Agency still forecasts that global supply will outstrip demand this year, which may help alleviate price pressures.

‍

Euro Vision: Lagarde Pushes for a Global Euro

Today, the US dollar is the world’s dominant reserve currency.

Nearly 60% of official foreign currency reserves are held in dollar assets and the currency is used to settle the majority of international trade invoices. 

Lately, however, the dollar’s status as king currency has been under threat. 

Amid chaotic US policymaking, market indicators point to a decline in dollar dominance as the reserve currency of choice.

That’s created the opportunity for competing currencies to step up – including the euro.

Lagarde: Europe must take ‘decisive steps’

Today, the euro accounts for just 20% of official reserves, a distant second to the dollar.

In an op-ed this week, ECB President Christine Lagarde argued that Europe should take steps to actively promote the euro as reserve currency:

• Lagarde noted that increasing the euro’s dominance could bring practical benefits, including lower borrowing costs and insulation from currency fluctuations.
• However, Europe must fix structural issues to promote the euro, including creating more cohesive capital markets and offering a meaningful alternative to Treasuries.
• In an apparent swipe at Trump, Lagarde stated that ‘the rule of law and the independence of key institutions’ should be leveraged as some of Europe’s key advantages.

Lagarde’s suggestions follow similar recommendations from Norway’s sovereign wealth fund last week, which pushed for more unified capital markets across Europe.

The euro’s ascendancy won’t be quick or easy. But distaste for the dollar could create the opportunity for a truly global euro.

Sidekick Takeaway: While reserve currency status can bring benefits, some analysts argue that it can also hurt a country’s industrial sector through structural overvaluation. While Lagarde’s push for a global euro is understandable, dethroning the dollar would not be without tradeoffs. 

‍

Feeling the Pressure: BoE Finances Squeezed Under Reforms

As the UK’s central bank, the Bank of England’s decisions impact the financial health of millions of households and businesses across the country.

But right now, the BoE’s own finances are under pressure. 

Following accelerated inflation and wage increases, the BoE’s costs have jumped. Since 2019, the bank’s total expenses have climbed over 20%.

Meanwhile, the BoE has experienced losses on its security portfolio due to record interest rate increases.

These funding pressures come at a challenging time for the bank, with mounting calls to modernise the BoE’s approach to monetary policy.

Bernanke review could lead to major reform

Earlier this year, former Fed chair Ben Bernanke conducted a sweeping review of the BoE’s operations. His findings underscore the need for reform at the UK’s central bank:

• According to Bernanke, the BoE’s infrastructure and software suffer from a ‘material degree of underinvestment.’
• Bernanke also pushed the bank to be more transparent about its rate forecasts and to expand its economic modeling.
• Between modernising existing infrastructure and expanding the bank’s capabilities, a comprehensive upgrade could easily cost tens of millions of pounds.

The BoE’s funding pressures are also having an awkward impact on the bank’s relationship with the Treasury.

The BoE typically remits a portion of the bank’s profit to the government, saving taxpayers money. But for the fifth straight year, no dividend has been paid.

Sidekick Takeaway: It might seem odd to talk about budget pressures at an institution with the ability to create pounds, but the BoE’s unique funding model creates the potential for a financial squeeze. Looking forward, the bank will need to be more cost-conscious to effectively implement Bernanke’s recommendations. 

‍

Notices

Sidekick Money Ltd is a company registered in England and Wales (No. 13882980). Sidekick Money Ltd is authorised and regulated by the Financial Conduct Authority (FRN 984829). Our address is 21-33 Great Eastern St, London, EC2A 3EJ.

𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.