Top stories
- The war in Iran continued to dominate headlines with the main issue from a financial markets perspective being the volatility in the oil price. The number of ships transiting the Strait of Hormuz has fallen to single figures on a daily basis, with a huge number of oil and gas tankers at anchor waiting for a time when the perceived risk of transiting the Strait becomes acceptable. Before the conflict began, around 90 tankers transited the Strait each day. With at least 18 vessels having been hit by drones or missiles, there are very few shipping companies willing to risk the passage.
- The oil price started the week by surging by 24%, to well over $100 a barrel. Both equities and bonds were dragged lower thanks to a deteriorating growth and inflation outlook. Over the weekend tensions had mounted with President Trump saying there would be no “deal” with Iran without “unconditional surrender” while Iranian President Masoud Pezeshkian dismissed any such prospect. The violent moves in financial markets on Monday were calmed somewhat after President Trump said the war was “very complete, pretty much” but added later that “we’ve already won in many ways, but we haven’t won enough”. On Wednesday Trump said the war would end “soon” because “there is practically nothing left to target… any time I want it to end, it will end”.
- Mojtaba Khamenei succeeded his father and was named Iran’s supreme leader. He is seen as a ‘hardliner’, much like his father and is known for his close ties to, and support from, the security services. Khamenei said in a written statement yesterday that the Strait of Hormuz should stay closed and that Iran believed in “friendship with our neighbours” and was only targeting US military bases. Khamenei promised to “avenge” his country’s martyrs. He said Iran’s attacks would continue until Iran gets security guarantees against further attacks from the US and Israel.
By the numbers
$35.84 – the range in the Brent Crude price in trading on Monday – the largest intraday range in the history of oil futures going back to the 1980s. Oil peaked on Monday at $119.50 but fell to an intraday low of $83.66. Oil price volatility has spiked in the past fortnight, but remains below levels seen during the pandemic, the financial crisis, Russia’s invasion of Ukraine and the 1991 Gulf War.
2.4% – US CPI in February, in line with expectations.
-92,000 – the US non-farm payrolls print for February, well below expectations. In addition, there were negative revisions of -69,000 to prior months data. The decline was exacerbated by a strike among healthcare workers in New York, California and Hawaii. The unemployment rate climbed to 4.4% from 4.3%.
Market movers
The Strait of Hormuz and disruption to the shipping of oil, gas and other commodities remains the key issue for financial markets even as we see hints from the US that military operations are expected to be concluded sooner rather than later. However, it will take two sides to reach a ceasefire and for now Iran appears unwilling to compromise. There are few signs of any domestic uprising, and the potential for regime change looks slim given the transition to a new supreme leader and the loyalty of the Revolutionary Guard. Iran has continued to fire missiles and drones at neighbouring countries, but the ongoing ‘closure’ of the Strait of Hormuz is the critical issue for commodity prices and the volatility in the oil price on every new headline highlights the sensitivity of risk appetite to the potential for further escalation. This is now an ‘asymmetric war’ with the US holding the military advantage, but Iran holding the economic upper hand given their ability to disrupt commodity supplies and pricing. Reports that Iran had begun laying mines suggested they are willing to escalate further and fully close the Strait – cutting off their own tankers and threatening their own oil exports and food imports. The US response, in destroying 16 minelaying craft highlights the urgency of ensuring the Strait remains navigable if shipping convoys are established or the military tensions ease. President Trump is floating the prospect of an end to hostilities, but Iran may take a different view, and with the Islamic Revolutionary Guards saying they would “not allow one litre of oil” to flow from the Gulf until hostilities ended. There remain significant upside risks to oil prices if the situation persists.
The investment lens
The financial market reverberations from the war in Iran will continue for the foreseeable future – even as President Trump continues to say the war will end “soon”. The impact on commodity prices and supply chains will likely extend beyond any cessation of military operations. The Iran war is yet another episode of geopolitical crises impacting financial markets, as we have seen multiple times over the past twelve months. Financial markets have seemingly become more adept at ‘looking through’ a lot of the geopolitical noise, rhetoric and posturing; not least because many geopolitical events do not have a direct impact on economic fundamentals. But those that do, such as trade wars or actual wars, still have the capacity to shift risk appetite as the economic mood sours. If the positive economic narrative that prevailed before the US and Israel attacked Iran is not disrupted by an extended war then our view would be that financial markets will recover, because the economic and earnings backdrop is positive. What could prove to be a relatively short spike in energy prices will not disrupt the disinflation trend too much and this would allow interest rates to be cut further in the US, and stay at low levels elsewhere.
History shows financial markets are unsettled by uncertainty. For the moment, despite heightened volatility, the equity market pullback has been mild, with more disruption seen in bonds on worries over the path for inflation and rates. We remain constructive in our view but vigilant. If we see a shift in perceptions that this conflict will prove to be longer lasting, with consequences for growth, inflation and rates, then the positive view for returns in 2026 will become outdated.
