Key Takeaways
- Events in the Middle East mean uncertainty for financial markets. That said, moves remain relatively modest. The S&P 500 stands around 5% lower.
- The Strait of Hormuz is key. Iran has effectively blocked it to shipping, which in turn keeps oil prices high and raises concerns around inflation and economic growth.
- Escort convoys have been proposed to get shipping moving, but such initiatives will take time to implement. In the meantime, Iran has the economic upper hand.
- Many central banks are meeting this week and a likely spike in inflation has flipped the narrative from one of likely easing.
- The situation remains uncertain and fluid. We continue to monitor developments closely.
There remains a huge amount of uncertainty but given that backdrop the drawdown in equity markets has been relatively benign. The S&P 500, for example, has trended around 5% lower. The story is similar for global indices.
If we look at events in the Middle East, and specifically the Strait of Hormuz, there remains a lack of certainty around what comes next. President Trump is talking about escort convoys to get oil exports flowing, but even with agreement across various nations those measures will take some time to set up. In the short term there are clear upside risks to inflation and economic growth from oil prices standing at more than $100 per barrel.
This backdrop will be at the forefront of central bankers’ minds as they meet this week. Looking back a few weeks, this Thursday’s Bank of England meeting was expected to result in an interest rate cut. That is no longer the case and market expectations are now beginning to factor in potential increases at some point.
Of course, things are moving fast and the backdrop could shift once again. If, for instance, we see the oil price trend downwards and some sort of conclusion to the conflict, the outlook will improve. For the moment, however, Iran’s effective closure of the Strait of Hormuz means it holds all the economic cards while the US holds the military upper hand.
For now, there is very limited shipping flow through the Strait, and this keeps upward pressure on oil prices. The blockade will also impact on broader supply chains, so unlocking the Strait to shipping remains a key factor for the global economy. The longer oil remains above $100 per barrel the stiffer economic headwinds will be. We are monitoring things closely and will adjust expectations from here as events unfold.
