Key Takeaways
- Uncertainty surrounds the Strait of Hormuz, with Iran claiming it is closed and the US insisting it remains open to international shipping.
- Although the 30-day ceasefire allowed flows to increase, shipping activity through the strait has once again started to decline.
- Oil prices have moved higher, rising around 10% over the past week, raising concerns about renewed inflationary pressure.
- Markets are now pricing in rate hikes from the US Federal Reserve, the Bank of England and the European Central Bank by the end of October, reflecting shifting inflation expectations.
- Equity markets remain relatively calm, but a prolonged disruption or renewed escalation could bring further risks around supply shortages and price rises.
Today, as we have been for many months now, we’ll be asking is the Strait of Hormuz open or closed, and what does it mean? Over the weekend we have once again seen attacks from the US on Iranian installations along the coast. Likewise, we have seen Iran attacking US assets across the region. And we’ve also seen on five occasions now the US attacking Iran after accusations of Iranian missiles hitting ships in international waters. So where are we now?
Well, over the weekend the Iranians said the Strait of Hormuz is closed once again. Conversely, the US said the waterway is open for international shipping to transit freely. But it depends on your appetite for risk on whether you want to leave the Gulf and sail through the Strait of Hormuz right now. Indeed, if we look at the memorandum of understanding signed in the middle of last month, that set out 30 days for shipping to return to normality, which would be the end of this week.
Now, however, we are a long, long way from that. Over the past few days, we have seen the number of ships transiting the strait start to dwindle once again. In total about 570 ships have left the Persian Gulf since the extension of the ceasefire agreed in the middle of last month – three-quarters of which sailed through the strait in order to do so.
This is a glut of oil that will enter global markets. But what we have seen this morning is the average oil price moving higher once again – by about 10% over the course of the past week and about 12% higher off the lows.
We are also seeing market movements in terms of interest rate expectations. In turn, that is impacting bonds. Equity market reactions have been relatively calm so far, which I think reflects the view that this is just another blip on a road towards peace rather than a return to full scale war. However, I think there are risks that we are underestimating, with the potential for this to be a more protracted issue and disruption to the Strait of Hormuz to continue for much more extended periods.
In terms of interest rate expectations, when we look at the eurozone, the Bank of England and for the US Federal Reserve, markets are now fully pricing a rate hike for all three of those by the end of October. And that really implies that inflationary expectations are going to be shifting as oil prices push higher once again.
However, there remains lots of room for manoeuvre here. President Trump said once again over the weekend that there was a deal being agreed and that there would be further talks over coming days. But Iran is pushing back and saying it wants to exert continued authority over the Strait of Hormuz. And that really does seem to be the sticking point in the short term.
We haven’t even mentioned the tougher issues around nuclear negotiations yet, but resolving the Strait of Hormuz remains key for both the economic outlook for financial markets and, of course, for the inflation view going forward.
If we do see these low-level attacks from either side continuing, and escalating, such that a ceasefire – which President Trump has already said is over – is indeed truly broken on both sides, then we are moving back to a scenario where we will be talking about price rises and supply shortages. We’re not there yet, but we need to be mindful of the continuing risks.
So, not a particularly optimistic update, but financial markets have become very adept at looking through a lot of these risks, so we don’t need to be taking too much risk off the table. But we do need to be conscious of the fact that we are going to see potentially more risk coming through if this conflict starts to escalate once again.
