WeeklyWatch – Oil, gold and conflict

17^th June 2025

Stock Take

Oil impacted by conflict

Investors were enjoying a relatively positive week…until Thursday night. Israel carried out a ‘pre-emptive strike’ on Iran, which has initiated an intense exchange of missile fire, resulting in a dramatic increase in oil and gold prices. Equities, on the other hand, moved in the opposite direction.

Since Trump was sworn into office in January, oil prices have been quite subdued, even in the face of the Republican mantra: “drill, baby, drill.”

However, in the immediate hours after the first airstrike, the price of Brent crude soared over 10% to US $78, eventually settling in the US $74 range, while the market assessed the potential widespread impact.

While the level remains below the US $80 level prices that were reached in January, it’s a significant increase on the $60 oil that was being traded in May. There has since been warning from analysts that prices could reach US $120 if Middle East tensions get worse.

Only once has Brent crude reached US $120 and this was back in 2022 following the Russian invasion of Ukraine, and China easing their COVID-19 restrictions.

Geopolitical uncertainty often leaves oil prices vulnerable to instability. Where events can impact the supply or economic growth is likely to increase, the price of oil will typically rise.

Oil prices can also have a mixed impact on equity markets. Energy companies usually find that higher oil prices lead to greater returns. But for other companies, higher energy prices can result in further costs which reduce their profits and opportunities for investments.

Another possible side effect of higher oil prices is higher levels of inflation. The Chief Economist at St. James’s Place, Hetal Mehta, says:

“Other recent flare-ups in the Middle East haven’t really moved oil prices so much. This time it looks like that might be different. Coming at a time when countries are still battling inflation, this is something to keep an eye on. Doubly so in the UK, where oil price increases tend to pass through to inflation relatively quickly.”

Bold gold – prices shoot up further

Despite already being high in price, the strike has also caused a spike on the price of gold. Over the last few years, numerous countries have been doing their best to stock up on the precious metal as a form of reserve.

Earlier in June, it was revealed by the European Central Bank (ECB) that gold had overtaken the euro as the world’s second largest reserve asset (after the dollar) in 2024. This has come about as a result of governments looking to gold as political uncertainty prevails.

As central banks acquired more gold, its price increased by more than 30%, in nominal terms, over the course of the year, and the trend continued into the first quarter of this year. But over recent months it’s fallen.

The ECB notes that an increase in financial sanctions being imposed has spurred on gold buying by particular governments:

“Recent research indicates that imposing financial sanctions is associated with increases in the share of central bank reserves held in gold. Notably, in five of the ten largest annual increases in the share of gold in foreign reserves since 1999, the countries involved faced sanctions in the same year or the previous year.”

UK figures make for mixed reading

The FTSE 100 suffered a small dent on Friday as a result of the conflict in the Middle East, following a historic high on the Thursday.

The high happened despite the Office for National Statistics (ONS) revealing that the UK GDP shrank by 0.3% in April, significantly more than the 0.1% that was widely expected by economists. New tax rises for employers that began in April have been pinpointed as partly responsible for the GDP drop.

Despite this, the fall followed a fairly strong first three months of 2025, which means that the British economy is larger than it was at the start of the year. Additionally, the FTSE 100 finished the week up 0.14%.

While the immediate impact of the conflict in the Middle East has been slightly more muted in the UK, Israel’s increased tensions with Iran caused a leap in the shares of large energy and defence companies, which are well-represented in the index.

US equities and trade deal positivity dimmed by Middle East conflict

After finally reaching a trade deal with China, things started to look up for the US, but their equities didn’t continue in the same positive manner. After rising over the first four days of the week, gains took a big hit, almost being reversed on Friday, resulting in the S&P 500 and NASDAQ finishing the week in negative territory.

Despite geopolitical tensions appearing to improve with the above deal, conversation at the end of the week was being dominated and determined by developments in the Middle East.

Wealth Check 

Labour’s Spending Review – are wealth taxes on the horizon?

The first Spending Review for Labour in 18 years… It’s been long awaited yet contained few surprises.

It included major pledges such as £113 billion in capital funding for infrastructure projects. In total, the government has committed to £300 billion in future spending.

Some of the standout recipients include the Department of Health, which received a £29 billion boost, laying the groundwork of the NHS 10-year plan, for which we’re expecting published details soon.

Other beneficiaries include energy infrastructure, which will benefit from substantial capital investment, including in nuclear. And defence spending will have an £11 billion increase. But, unsurprisingly, the headline grabber has been Chancellor Rachel Reeves’ reinstatement of the Winter Fuel Allowance.

But how much will this review shape the Autumn Budget?

The economic influences

In regards to economic outlook, it’s not looking particularly bright for the UK… Inflation is sticky – that is to say, higher than expected. Growth is at risk from, particularly, both the US tariffs and ongoing conflict in the Middle East. And with the rise of gilt yields, government borrowing has also increased.

The Chief Investment Officer at St. James’s Place, Justin Onuekwusi, says:

“Despite a strong start to the year, we expect the UK economy will likely slow down through the rest of the year due to weakening business sentiment and the impact of tax increases in increased employer contribution implemented in April.

“We remain concerned about inflation and believe it is likely to remain inflated. Services inflation is still running at over 5% and despite some softening in the labour market, pay growth remains stubbornly high.

“Though the review mainly allocates existing funds, ongoing public spending pressures suggest future borrowing and possible tax rises.”

The Autumn Budget starts to loom

The Office for Budget Responsibility’s forecast in the autumn will be required to address these issues. Additionally, other governmental policy initiatives like changes to immigration will need to be factored in.

The Chancellor is also likely to face pressure from Labour to increase spending in the Autumn Budget.

As part of their election manifesto, Labour said no to increases to income tax, employee National Insurance contribution and VAT. However, there are other levers they can pull. It’s been estimated that the government could levy taxes of around £15 billion without crossing red lines, but by doing this, they leave little room for significant spending commitments. This leads experts to believe that tax rises could be on their way.

What’s down the line?

Numerous tax-rising measures have been speculated on including extending the freeze in personal tax thresholds beyond April 2028, which may raise around £7 billion per annum.

More measures to limit tax avoidance may be put into place and changes to property taxation are possible. This could be an additional band on council tax or increases to existing higher bands to raise up to £2 billion.

There’s been additional speculation surrounding the lifetime allowance on pensions and addressing salary sacrifice arrangements. But both these measures would be challenging to implement and would likely cause sector-specific problems, particularly for the NHS.

The Advice Divisional Director, Claire Trott, says:

“Salary sacrifice arrangements offer valuable National Insurance (NI) savings for both employers and employees, so any changes would be unwelcome, especially in light of the increase to employers’ NI earlier this year.

“Introducing further changes to pension taxation also risks undermining pensions as a long-term savings vehicle. With other changes to the pension system on the horizon, there is a danger that these alterations could cause even more confusion and savers could become more disengaged with pensions – which is especially worrying as individuals have increasing responsibility to plan and save for their retirement.”

Updates to ISAs are also likely to feature in the Autumn Budget. The Treasury is looking to encourage more investment in UK markets. A frequent suggestion refers to the cap on cash ISAs with the belief that people will invest more in equities than in an ISA.

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In the Picture 

UK GDP contracted by 0.3% in April…not happy reading for Chancellor Rachel Reeves.

Having said this, if we look at the figure over a longer timeline, it’s placed in better context. Growth levels since COVID-19 haven’t necessarily been strong, but the figure still remains above pre-pandemic levels.

The economy remains ahead of where it started the year thanks to good growth in the first quarter of 2025.

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SJP Approved 16/06/2025