A late PS: Barani Krishnan, Senior Commodities Analyst at Investing.com, suggests the White House is caught in two minds over Iran:

“Trump has muddled his response to the Iranian situation, first tweeting that shooting the drone down was a ‘big mistake’, then backtracking in comments to reporters that it was probably the actions of a ‘stupid’ individual general.”

“The president seems to be bending over backwards these days not to add to geopolitical tensions that could send oil up 5-6% in a day like this. With his reelection bid in, low oil, and gas prices at the pump, seems to be Trump’s primary concern. That’s why he’s even suggested being open to making peace with Tehran, despite the continued noises against Iran by some in his administration.”

US oil prices have now posted their biggest one-day gain in five months.

Donald Trump’s warning that Iran has made a “very big mistake” by shooting down one of America’s RQ-4 Global Hawk surveillance drones has loomed over energy markets today.

Here’s Marketwatch’s take:

Language from Trump “has driven up oil as traders fear supply in the Middle East might be squeezed by Washington D.C. potentially taking a tougher stance on the country,” said David Madden, market analyst at CMC Markets.

July West Texas Intermediate oil CLN19, +5.80% rose $2.89, or 5.4%, to settle at $56.65 a barrel on the New York Mercantile Exchange.

That was the highest front-month contract finish since late May and biggest one-day dollar and percentage gain since December, according to Dow Jones Market Data.

This, however, might be reassuring...

This won’t calm nerves in the oil market:

Are investors getting carried away by the prospect of a US interest rate cut?

They should remember that central bankers are becoming more cautious because the global economy looks weaker - not really a cause of jubilation.

Fawad Razaqzada of Forex.com reckons the rally could “turn to despair” once markets have digested the situation.

He points out:

Rates are being cut because the global economy is, or perceived to be, slowing down amid the escalation of geopolitical risks. With global interest rates already so low, how much of a boost would the economy get from (the promise of) a 25 or 50 basis point reduction in interest rates?

Granted, it will increase the marginal supply of cheap credit further, but that is not the issue here; it is all about marginal demand, or lack thereof, for cheap loans from consumers and businesses because of the latest or upcoming interest rate cuts. I think the law of diminishing returns apply here. Also, with central banks keeping rates so low for such a long period of time, what will happen if the economy were to deteriorate even further?

Will the Fed and other central banks have any more monetary policy tools left at their disposals then? And what about a situation where we see a sudden economic recovery or a big jump in inflation? Surely in this event, central banks will have to tighten their belts quickly, potentially choking off growth.

US crude oil is now up nearly 6%, on fears of disruption in the Gulf.

Neil Wilson of Markets.com says Donald Trump’s “belligerent” tweet accusing Iran of a ‘big mistake’ is driving oil up.

Oil has extended gains on this response from the White House, which sounds quite belligerent. West Texas Intermediate is up 5% to 56.76, while Brent has broken up above $64.

Oil has risen to its best in three weeks and now looks to have moved out of its bottoming formation.

Oil is on track for its biggest daily rally in five months, driven by concerns that the US and Iran could be heading for military conflict.

Nearly every one of the 30 companies on the Dow Jones industrial average are up too.

The top riser is Nike (+2.45%), followed by several tech firms including Cisco (+2%) and IBM (+1.7%).

JP Morgan, though, is a rare faller - down 0.4%. Lower interest rates aren’t good news for banks, as they erode the profit margin between borrowers and savers.

President Donald Trump is excited by today’s Wall Street action:

With the re-election campaign kicking off, the president will use the stock market as proof that he’s doing a good job.

He’ll also take the credit, pointing to his campaign to force the Federal Reserve to stop raising interest rates and start cutting (as they may do next month).

Every sector of the US stock markets has risen today, helping to drive the S&P to today’s new all-time peak.

Energy stocks are leading the rally, up 1.8%, followed by technology (+1.34%), miners (+1.2%), healthcare (+1%) and industrial companies (+1%).

Having read the Bank of England minutes, Thomas Pugh of Capital Economics reckons the Monetary Policy Committee is more worried that Britain could crash out of the EU without a deal.

He writes:

Clearly the weaker economic news has played its part in causing the MPC’s dovish shift, but there are also signs that the Committee is becoming more concerned about the possibility of a no deal Brexit.

Indeed, instead of chastising the market for underestimating how much interest rates might rise as it did in May, the MPC pointed out “the ongoing tension between the MPC’s forecast… of a smooth Brexit and the assumptions about alternative Brexit scenarios that were priced into financial market variables”.

The minutes are online here.

There is something slightly odd about today’s minutes from the Bank of England, as it leaves interest rates on hold.

On one hand, the Monetary Policy Committee sounds more concerned about Brexit (“the perceived likelihood of a no-deal Brexit has risen”), the economy (no growth is expected in the current quarter) and the balance of risks (“downside risks to growth have increased”).

And yet... they still expect to raise interest rates at a gradual pace over the next couple of years.

Why hasn’t the Bank’s guidance changed, if the economic picture has darkened? Are they afraid to sound too gloomy, or are they simply hoping that conditions pick up?

Chris Giles of the Financial Times suggests that any dissenters on the MPC aren’t prepared to break cover yet.

Nancy Curtin, Chief Investment Officer at Close Brothers Asset Management, believes there’s no chance of a UK interest rate rise until the next Brexit deadline.

“With Brexit unresolved, it is now practically inconceivable that there will be a rate hike between now and October, despite GDP growth being close to potential. MPC members have been doing the rounds of late, making hawkish comments and it’s easy to see why. The labour market is tight and prices are rising in sectors sensitive to the output gap, but – for now – this is being outweighed by weak goods inflation. With headline CPI on target, that’s a decision for another day.

“UK businesses continue to be haunted by the looming Brexit deadline of October 31st and the spectre of uncertainty is weighing on activity. Even if a No Deal exit is averted for now, the cost of delay will mount if negotiations are extended once again. Consumers may receive some respite; above inflation earnings growth and continued low interest rates mean UK households have a bit more spending power, which is supporting the economy. With the end of Carney’s tenure on the horizon, a rate rise might be an issue for his successor to grapple with.”

Bad news for workers: the Bank of England’s economists reckon that UK earnings growth “might have levelled off”.

Better news: They also predict that inflation (which fell to 2% last month) will fall further in the coming months.

The nine policymakers on the Bank’s Monetary Policy Committee were unanimous this month.

They all agreed to leave interest rates at 0.75%, and still collectively agree that (should Brexit go smoothly) it makes sense to raise interest rates over the next couple of years.

The minutes say:

All members judged at this meeting that the existing stance of monetary policy was appropriate.

The Committee continued to judge that, were the economy to develop broadly in line with its May Inflation Report projections that included an assumption of a smooth Brexit, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

With Brexit now delayed until (at least) 31 October, the Bank of England fears that businesses will keep sitting on their hands rather than buy new equipment and machinery.

The minutes of today’s meeting state:

The underlying pattern of relatively strong household consumption growth but weak business investment had persisted.

Surveys suggested that companies expected uncertainty to persist at elevated levels, and there were no clear signs that investment growth would pick up ahead of the October Brexit deadline.

The Bank also points to the recent shutdowns in the car industry (as manufacturers braced for a no-deal Brexit that never came).

It hopes that car production will accelerate over the summer:

Weakness in motor vehicle production, related to some car manufacturers’ Brexit contingency plans, was likely to push down on Q2 GDP growth, but push up on Q3 growth

Ouch! The Bank of England has also lowered its growth forecast for the second quarter of 2019, to zero.

It had previously forecast 0.2% growth in April-June.

It’s nearly time for the main news of the day - the Bank of England’s monetary policy decision.

The City is confident that the BoE will leave interest rates on hold today, at 0.75%. It probably won’t make any changes to its quantitative easing programme either (which holds £435bn of mainly UK government bonds).

But investors want to hear the Bank’s views on Brexit, the state of the UK economy, and whether any policymakers are leaning towards an interest rate rise, or even a cut (just as America’s Federal Reserve prepares to start cutting).

Sam Cooper, Vice President of Market Risk Solutions at Silicon Valley Bank, sets the scene:

“Market attention turns to the bank of England in this week’s central bank relay.

Participants will be searching for clues from the MPC as to the future path of monetary policy, with retail sales disappointing and inflation running on target, the case for the Bank of England to follow the lead from its US counterpart is gradually building.

While sterling enjoys some welcome respite after last night’s dovish hold from the Fed, any dissent within the committee in favour of an interest rate cut or reference to more accommodative policy in the statement could see the pound quickly reverse its recent bout of strength against the dollar.”

Iran’s threat of ‘consequences’ against America will fuel fears of military conflict in the Gulf region.

The Strait of Hormuz handles around 20% of the world’s oil (tankers from Qatar, Kuwait, the UAE and Saudi Arabia’s east coast all pass through on their way to the rest of the world)

Economist Alastair Ross suggests markets are taking the drone shooting quite well:

However, that could change if America takes a robust response to this latest incident (Donald Trump hasn’t tweeted yet today....)

Iran’s foreign ministry has now weighed in, criticising America for illegally (it claims) violating its airspace.

Ministry spokesman Abbas Mousavi says:

“Any such violations of Iran’s borders are strongly condemned ... We warn of the consequences of such illegal and provocative measures.”

There’s another reason oil is rising -- yesterday a rocket hit an Iraqi compound housing several international oil companies, including the US multinational ExxonMobil.

That has heightened concerns that oil shipments from the Middle East could be disrupted.

Just in: UK retail sales fell in May, as the poor weather deterred people from buying new clothes.

Shoppers bought 0.5% less stuff in May than in April, the Office for National Statistics reports, with the amount spent dropping by 0.3%.

Britain suffered some rather cold weather last month, with the May Bank Holiday particularly inclement. This appears to have hit clothing sales, which slumped by 4.5% month-on-month, the ninth monthly decline in a row.

The ONS says:

Evidence from retailers suggested that the poor weather may have delayed the sales for summer ranges.

Department stores are also struggling, with sales down again.

Some traders reckon America’s central bank could pull out its bazooka next month, and slash US interest rates by a chunky 50 basis points.

That would be a serious reversal of its recent policy of raising interest rates, and suggest it is worried about growth prospects.

Newsflash: Norway’s central bank has defied the prevailing mood by raising interest rates.

The Norges Bank voted to hike borrowing costs from 1% to 1.25%, in response to rising underlying inflation and solid growth.

But.... it also acknowledges that other central banks are moving towards cutting rates.

The upturn in the Norwegian economy appears to be a little stronger the coming year than projected earlier.

On the other hand, there are prospects for weaker external growth and lower foreign interest rates.

Stock markets around the globe are also rallying today, thanks to the prospect that America’s interest rates could be cut next month.

In London, the FTSE 100 index has jumped by 30 points, or 0.4%, with European indices also rallying.

That follows a strong session in Asia, where China’s CSI 300 surged by 3% and Japan’s Nikkei gained 0.6%.

Naeem Aslam of Think Markets says the Fed’s dovish twist is driving shares up.

We all know that central banks have been data dependent, but it is only now that they have started to acknowledge the weakness in the economic numbers.

Last night, the Fed lowered its inflation forecast from 1.8% to 1.5% but , there wasn’t any change in the growth forecast. The reason that the event was dovish came from fact that the Fed’s outlook of the economy isn’t positive; they said the global uncertainties are increasing. They feel it is time to shift the needle of the their monetary policy to spur the growth again or at least not letting the global economy go off the rails.

The tantalising scent of a US rate cut is lifting the pound away from the five-month low of $1.2504 struck on Tuesday.

Neil Wilson of Markets.com says it’s “quite a chunky move”, helped by the prospect that UK interest rates could be raised in the coming months:

Maybe the prospect of a more hawkish Bank of England is helping the pound.

At least Mark Carney doesn’t have to deal with a political leader on his case…

Well, not yet anyway. Even so, political uncertainty is still weighing on sterling, Wilson adds:

The prospect of Boris Johnson taking Britain out of the EU come October 31^st is a risk. There’s now talk of a possible general election if he gets in – risky, we know what happened to Theresa May.

The prospect of a general election would not do anything to remove uncertainty around UK assets. Zero clarity still.