Take Frankie’s Advice! - Global market update

Back in the early 1980s in the city of Liverpool, singer Holly Johnson teamed up with Paul Rutherford and three others to form the band Frankie Goes to Hollywood – a name taken from an advertisement announcing Frank Sinatra’s movie debut. Their first album, ‘Welcome to the Pleasuredome’, was released in October 1984 and had advance sales of over one million copies – a celebrity made all the more by the fact that the BBC banned their songs from broadcast for their provocative themes. A third single, the ballad "The Power of Love", was released in November 1984 and reached number one in December, making Frankie Goes to Hollywood the second act in the history of the UK charts to reach number one with their first three singles. But it is their second single that is called to mind now as ‘Two Tribes’ go to war.

As markets opened last week, investors braced themselves for volatility and the usual playbook for events like this was dusted off – dollar stronger, oil and gas prices up, risk assets sell off, and safe havens rally. Within a few days though, only some of this has come to pass. The safe havens didn’t act like we expected, with gold and US government bonds initially selling off before stabilising. Equity markets were volatile but, ironically, most of the damage was done in Europe (we will leave Korea out of this!!) as investors took profits after a strong start to the year – the US was barely changed over the period. Oil and gas prices did rally but are still a long way off the levels seen in previous conflicts – that said, retail fuel prices in Ireland seem to be a law onto themselves!

So where does this leave us now? Well assuming as you read this on Monday morning, the conflict is still ongoing (if not, please fast forward to the last paragraph now), the terms of this war will be dictated by the Trump administration. From the start, it has been hesitant to define what success looks like and what the nature of the conflict will be. It could be that it just wants to remove Iran’s military threat to its neighbours and the wider world and therefore may be in a position to declare victory soon by saying this threat is gone. Whether this is enough to satisfy Israel is unlikely though as its intent is to see total regime change as well. 

The fact that other Gulf states have also been attacked by Iran in the last week begs the question whether, in time, these states turn from defence to offence and whether there is further escalation with Iran activating its so-called proxies like Hezbollah and the Houthis. It could be argued that we have already seen previous thresholds crossed, so the risk of escalation is always possible.

Therefore the ‘quick’ outcome to this war is that Trump has a way to claim success and walk away – regime change will take much longer and could bring him down roads he doesn’t want to travel. The ‘Epic Fury’ campaign will put pressure on the US budget deficit that was already projected to be $1.9trn in 2026, and this is before we factor in any tariff rebates that may have to be paid to the growing number of US companies looking for their money back. With the national debt standing at $38trn, this conflict will also put more pressure on debt funding for the government – perhaps explaining why bond yields went up last week rather than down. While the debate around lower interest rates in the US continues, few are looking for higher yields.

The Defence (aka War) Department will need a multi-year investment cycle to attain normalised inventory levels of munitions that have been depleted following multiple conflicts (Ukraine, Venezuela, Iran x2), and this means a supplemental budget for defence is most likely and, with that, the likelihood of extensive arguments in Congress in the run-up to the midterm elections. 

A protracted conflict will also mean higher for longer oil prices, which will add fuel to the fire (pardon the pun) around the affordability question – already high on the agenda for the upcoming elections and an easy stick for the Democrats to beat the administration with; after all, prices are not lower now even though the ‘Don’ promised they would be. Ultimately, the question could be whether the attack was worth it, particularly as there is limited impact on the US from Iran and the ‘MAGA faithful’ have limited interest in overseas matters. 

But back to the title of this week’s piece – what is Frankie’s advice? Those of you around in the 1980s will remember the cult fashion item that was the plain white t-shirt with the words “Frankie Says Relax” – and that is what investors should do. One of the primary benefits of having a financial plan is that it incorporates multiple scenarios just like what we have seen over the last week and will definitely see in the future. It aligns your needs and goals with whatever speed bumps the financial markets and the broader world want to throw at you. There will always be volatility, but as long as your own circumstances don’t change, then you can stick to the plan and relax!