It is obviously a hugely volatile situation currently in the Middle East as the conflict goes into a third day of military strikes. Rather than a one-off series of attacks, at present this seems to be a longer campaign with regime change being the objective of the US and Israel. That means escalation risks are raised with a wider scope for Iran retaliation, who have already hit neighbouring Arab states. A prolonged regional war with Hormuz Straits disruption is the biggest issue for markets. Experts reckon roughly 30% of the world’s seaborne crude oil, nearly 20% of global jet fuel and about 16% of gasoline and naphtha flows pass through the Strait. The logistical friction is already there with notably air traffic hamstrung by airspace closures and cargo vessels rerouting.
Of course, if the conflict is contained, any initial oil spikes could quickly reverse as energy flows remain intact and retaliation is limited. Interestingly, crypto markets have been open over the weekend and have already seen a rebound in prices, after the initial shock news that military action had started. For stocks, certainly volatility levels will be high with defence, energy and airline sectors on the radar. There will undoubtedly be sharp news-driven price swings, with the situation both intense and highly fluid. Longer-term and more broadly, geopolitical issues rarely become major investment issues if the economy is on a solid footing.
The dollar printed a tiny inside week as prices traded just below the 50-day SMA. As we wrote last week, it has been supported recently amid higher oil prices. That emphasizes the greenback’s safe‑haven appeal which comes into play when geopolitical tensions trigger oil shocks, whereas the buck’s safety attraction is now more broadly diminished post-Liberation Day. That is also due to alternative safe havens like JPY and EUR being net energy importers which means their terms of trade get hit when crude prices surge. Bulls in gold and oil look to be in a good position after last week’s upside breakouts. Brent crude is toying with the July highs from last year ahead of April and June peaks at $75.34 and $79.45. A false break sees prices back to initial support around $70.
Calendar wise, there is some top tier US data including the monthly jobs report. Headline expectations of 60k sit only just above the estimated 50k breakeven pace, while just two sectors account for roughly 70% of all jobs added over the past three years. But with unemployment historically low, layoffs subdued and vacancies steady, policymakers’ focus may have shifted towards inflation, unless we get some outsized figures. Before the weekend, money markets didn’t see any imminent rate cuts, with the next move not predicted before June.