Tensions in the Middle East have resumed, kicking off a long summer of financial market uncertainty.
- Donald Trump has declared the ceasefire with Iran “over” with attacks resuming on both sides
- It is not clear whether the Strait of Hormuz is shut, and the oil price reflects the uncertainty
- Bond markets have borne the brunt of the volatility
Here we go again. Anyone hoping for a lull in geopolitical noise over the summer months have been sorely disappointed as tensions between the US and Iran resumed. Donald Trump has declared the ceasefire “over” and attacks on Iranian assets have resumed, apparently in retaliation for Iranian strikes on ships in international waters.
There is some debate on whether the Strait of Hormuz is open or closed. If the various Hormuz tracker sites are to be believed, traffic is still passing through, but oil market traders continue to sound an alarmist note.
Anthony Willis, senior economist at Columbia Threadneedle Investments, says: “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.”
The oil price reflects that uncertainty. It has risen around 10% to just under $80 a barrel. This is a long way from its highs during the peak of the crisis, when brent crude hit almost $110. There is no doubt that having the Strait open for the past few weeks has deferred the problem somewhat, but it remains volatile.
The pattern for financial markets has been familiar. Stock markets have sold off a little, then decided that it doesn’t matter as much as they thought and they only really care about AI anyway. The S&P 500 is up around 1% over the week and 1.8% over the month.
Bond markets remain the release valve for tensions over the Strait. The UK 10 year gilt spiked to over 5% this week, giving Andy Burnham’s incoming Chancellor an uncomfortable welcome. Willis says: “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.”
These rate rises do not look inevitable. The latest US inflation reading undershot for June. It wasn’t just lower energy costs driving the weakness, prices for shelter, goods and services also appeared under control. Once again, bond markets are fulfilling the ‘shoot first, ask questions later’ role traditionally adopted by stock markets.
