After a relatively calm start for financial markets, the war that America and Israel have engaged in with Iran has made a dramatic impact on energy prices given that 1/5th of the global oil output comes from the Middle East. Iran has essentially placed a blockade on the transportation of oil and gas through the Strait of Hormuz, with insurance companies significantly hiking up their costs given the extensive risk posed by attacks from Iran. Normally, there are 50-60 tankers a day that pass through the Strait of Hormuz; currently less than 15 a week are taking the risk to sail.
As a result of the conflict, oil and gas prices have surged to highs not seen since the invasion of Russia into Ukraine, back in 2022. Oil has surpassed the psychological $100/barrel, with the view that a prolonged conflict with Iran will see prices rise further. The concern for investors is the knock-on effect on global economies with disruption to supply chains and higher energy prices, all of which will impact inflation, which had been coming down steadily over the past 4 years.
Iran has escalated the situation with attacks on neighbouring countries’ oil and gas infrastructure which has exacerbated the situation and is leading to shutdowns at many refining plants in the Middle East. It is also worth noting that global oil inventories have been rising, which provides a partial buffer against near-term supply disruption. That does not eliminate risk, but it may dampen the impact unless escalation becomes materially worse.
In the UK, investors had effectively nailed on an interest rate cut in March, however; given the current spike in energy prices, it is very doubtful this will occur. The unemployment rate has been rising and is currently at 5.2%, the highest in 5 years, with inflation falling to 3%. Taking all of the above into account, however, inflation is certainly going to rise in the coming months.
You would be forgiven for completely missing the Chancellor’s Spring budget, however; given the events in the Middle East it’s understandable why it was largely overlooked. There were no surprises, with no further requirements to raise additional taxes at this stage.
Key takeaways were that GDP growth is expected to be lower and unemployment is expected to rise, all of these numbers are before events in the Middle East were factored into the Office of Budget Responsibilities (OBR) calculations. Difficult decisions will no doubt be delayed until the Autumn budget.
We expect markets to remain volatile in the days and weeks ahead, all depending on any escalation in events. News flow may be intense and, at times, sensational. It is important to distinguish between media tone and market fundamentals.
At this stage, whilst it seems dramatic, this is not a systemic market event. We are not seeing disorderly trading conditions or liquidity stress. As always, we remain vigilant and ready to adjust positioning should fundamentals materially change.