Markets have been relatively sanguine about the crisis in the Middle East. That might change at the crucial six-week mark. Markets have been relatively sanguine about the crisis in the Middle East. That might change at the crucial six-week mark.
- As it stands, there is likely to be a small and temporary blip higher in inflation
- This places some faith in the combined powers of the US and its allies to get the Strait of Hormuz open
- Once the crisis goes on beyond six weeks or so, the game changes and markets may shift
Iran is currently holding the world economy to ransom. It has closed the Strait of Hormuz, and with it global access to fossil fuels from the Middle East. This has some potentially dire economic consequences, threatening to lift inflation and interest rates. Yet markets have remained, for the most part, relatively calm.
The calculation appears to be that while a crisis is possible, we’re not there yet. If the Strait reopens within six weeks or so, there will be a small blip higher in inflation, but interest rate cuts are likely to be deferred rather than derailed. For the UK, for example, cuts may come in April rather than March. It’s annoying rather than catastrophic.
Fed Chair Jay Powell summed up this view as he kept rates on hold this week. He emphasised the need not to overreact to current events, noting “it’s too soon to know how these will affect the data”. Oxford Economics says: “Where oil prices average around $100pb for two months, it would shave a few 10ths of a percentage point off global GDP growth via higher inflation, but recessions would be avoided.”
This places some faith in the combined powers of the US and its allies to get the Strait open, and yet it’s not entirely clear how that will happen. Iran only needs to take out one or two boats to deter shipping companies and their insurers. Equally, Trump’s increasingly desperate pleas to European powers to send him a few minesweepers suggests he hasn’t got much of a plan either. Recent attacks on gas facilities in Qatar have taken the situation up a notch.
Once the crisis goes on beyond six weeks or so, the game changes. That is when inflationary pressures start to spread through the economy – into fertiliser prices, into agriculture, into the prices of other goods and services. At this point, markets will no longer be able to look through the current crisis, but must contend with its real-world consequences.
With this in mind, the current calm in markets takes on a slightly uneasy feeling. As Powell said in his speech, uncertainty is exceptionally high. Markets appear to be in a holding pattern, hoping for the best, but with the worst case still very much on the table.
