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Once again the conflict in the Middle East has dominated the headlines with the ceasefire looking even more fragile as the US and Iran conducted attacks and retaliatory strikes, the US reinstated the blockade of Iranian ports and shipping and Iran’s Islamic Revolutionary Guards Corp declared the Strait of Hormuz closed once again. President Trump said the strait “will remain OPEN, with or without Iran”. The ceasefire, extended last month, is now being routinely broken on both sides. The closure of the Strait by Iran and renewed US blockade both breach the Memorandum of Understanding signed last month – the deal that was to set the framework for a sixty day ceasefire while negotiations continued over a longer term deal and resolution of the nuclear issue.
President Trump announced, and then swiftly withdrew a plan to charge a 20% fee on all cargoes transiting the Strait as payment for the US acting as a “guardian” for shipping. The plan saw significant pushback from Gulf allies along with shipping companies. Iran pointed out that their terms, charging up to $2 million per transit, were far more competitive than potential payments of $32 million for a fully loaded Very Large Crude Carrier under the US plan – this would equate to an additional 37 cents on a gallon of US gasoline. Neither the Iranian or the US plan would have been compatible with international law, under which ships are generally guaranteed transit rights through waterways used for international navigation (such as Hormuz) and coastal states cannot charge vessels. Ships can be charged for “specific services”, which could include escort services by the US navy supported by air power. But the US would have had to significantly ramp up their resources to facilitate escorts for all vessels.
In what (for now) appears to be a relatively key transition of UK Prime Ministers (the focus in England has invariably been more on Messrs Kane, Bellingham, Rice, Pickford etc – up until Wednesday night anyway) former Mayor of Manchester Andy Burham secured the backing of 349 of Labour’s 403 MPs, meaning he could not be challenged given the threshold for a nomination was 81 MPs. Burnham will be confirmed as party leader today, and on Monday will be asked by King Charles to form a government, once current Prime Minister Keir Starmer tenders his resignation. The focus will then swiftly turn to ministerial appointments, not least the next Chancellor, and what is likely to be a wave of policy announcements.
By the numbers
- China reported second quarter economic growth of 4.3% year on year, the slowest pace of growth since 2022 and below the 4.5-5% target. Growth was impacted by the Middle East conflict, lacklustre domestic demand and a reduction in investment. The soft domestic data was offset by surging exports, notably demand for AI related hardware. Retail sales in June grew only 1% year on year, while fixed asset investment was down 5.7% year on year for the first half of the year.
- US inflation eased to 3.5% year on year in June from 4.2% in May, helped by lower gasoline prices. The figure was lower than consensus expectations of 3.8%. Core inflation was 2.6%, compared to 2.9% in May. Gasoline prices were down 9.7% month on month. US Federal Reserve Chair Kevin Warsh said the central bank should not declare “mission accomplished” in the fight against inflation after the CPI data release. Warsh said he was committed to reducing CPI to the Fed’s 2% target rate and the central bank had “no tolerance for persistently elevated inflation”.
Market movers
This morning sees Brent Crude trading at $85/barrel, a long way off the highs during March and April, but still up 12% this week. The escalation in the Middle East is driving the oil price higher, with a notable drop in oil tankers transiting the Strait of Hormuz given the attacks on shipping by Iran and reinstatement of the US blockade. Per the original memorandum of understanding, shipping was intended to return to prewar levels by the 30th day of the ceasefire extension – i.e. today.
Renewed concerns over oil supplies come at a point where global oil inventories are depleted, compared to the first phase of the conflict. Inventories were rapidly drawn down, helped by expectations the conflict would be relatively short in duration. The brief reopening of Hormuz allowed large volumes of oil to ‘escape’ but not at levels to allow the start of inventory rebuild. This means further upside risks to oil over the coming weeks should the conflict escalate.
What is more positive for the longer term is efforts to mitigate any further closure of the Strait of Hormuz through the use of alternative transport means. This will not be a complete resolution, and the focus for now is on oil transport so other commodities and supply chains will continue to be disrupted. But we are seeing the rapid roll out of plans to increase pipeline capacity though Saudi Arabia to the Red Sea, and through the UAE to the Gulf of Oman. In addition, projects through Iraq, Kuwait and Syria and on to the Mediterranean will give another exit route over the longer term.
We are also seeing new port facilities planned on the Gulf of Oman side of the UAE to bypass the Strait of Hormuz. DP World operates the UAE’s main port facility at Jebel Ali. Activity at the port fell between 90 and 95 percent during the closure of the Strait of Hormuz. DP World said the new port could be up and running in as soon as 18 months. None of these pipelines and port facilities can resolve the immediate problem; but they will help to build resilience against future disruption.
The investment lens
Equity markets are showing some fragility at the moment with heightened geopolitical tensions dominating the headlines but equally we are seeing a reversal in some of the momentum themes as the unwind of leveraged trades and further questioning of the valuations and spending of companies at the centre of the AI boom is leading to some sharp reversals, particularly in markets such as South Korea, where the market rally had been exceptionally strong. As we embark on quarterly earnings season, even companies reporting another stellar quarter are being closely scrutinised over further spending plans and their ability to monetise ever growing levels of capex. Renewed doubts over AI related spending, coupled with heightened concerns over the Middle East and impact on the inflation/interest rates outlook is clearly impacting market sentiment and momentum. Clarity on either theme will take time. More positively, we should be mindful we are still seeing solid economic performance overall, and despite concerns over the future, corporate earnings growth is strong and reasonably broad based.
As the Middle East conflict intensifies once again, President Trump has suggested Iran is continuing to request peace talks. But the actions of both sides this week suggest that negotiations are not a priority for now. A broadening of US attacks, as President Trump threatened for next week, on Iran’s bridges and infrastructure, would render the diplomatic progress made in June irrelevant. Trump has previously made threats to attack civilian infrastructure but has not followed through. Further escalation to ‘bring Iran to the table’ is a strategy that could result in the duration and scope of the conflict being extended significantly. Iran will not want to give up ‘control’ of the Strait of Hormuz as it has recognised that this is its primary tool of leverage against a superior military, and given Iran has shown already a high threshold for economic and military pain, the regime may well look to ‘dig in’ and test the endurance of the US in the face of rising energy prices. Recent events have shown President Trump will move to the brink of escalation before finding a compromise, but often we have seen more distress in financial markets, and significantly higher oil prices, before pragmatism has prevailed. On this basis, things may have to get worse before they get better.
