The markets remained under significant pressure following the recent events. In early March, the Middle East rewrote the rules for global energy, logistics, and financial markets. The focus was no longer on Friday’s employment numbers. The focus was on oil and shipping.
Main Accidents
Four events, two days, and the region has not been the same since. Those weekend events played out quickly.
Supreme Leader neutralized. The coalition strike in Tehran confirmed that Ali Khamenei is officially dead. The unity of command in Iran is in question, and the IRGC without a central command is not something many scenarios anticipated.
Damage to Saudi infrastructure. Iranian drones and missiles struck Saudi Aramco infrastructure, including areas around Abqaiq. While the full extent of the damage was not yet clear, oil prices did not wait for the numbers.
Airports in the Gulf are grounded. Dubai International Airport and Doha’s Hamad International Airport have been brought to a standstill. The implications of these events extend beyond air travel – they are part of the artery linking Europe and Asia.
Hormuz suspended. The IRGC announced that it was suspending maritime traffic through Hormuz. While it remained open to debate whether the measure was being implemented in whole or in part, markets were already factoring it in.
Oil is Under Pressure
The idea of buying oil in such a scenario sounds easy, but it is not.
China is also vulnerable to oil disruption. A considerable portion of the crude oil that China imports is from external sources such as Russia, Iran, and Venezuela. If there is an oil supply in these countries, the price of crude oil will increase. This may affect industrial production. This may also affect the Australian market.
The impact of the disruption is somewhat reduced by the fact that China still has some buffers in place (Petroleum Reserves; Russian oil production via pipelines; rerouting of production via other routes, such as the Red Sea).
When we analyze the global oil market, it seems there is still room for maneuver. The US can draw on oil volumes. Similarly, Saudi Arabia/UAE can reroute the supplies. In such a scenario, the disruption will be minimal.
The question is, is it enough? If the physical barrels hold up, then there is no risk premium. If they do not hold up, then the volatility will be higher. $100 for oil is reasonable in the short term. $150-200 requires a physical disruption.
The market is driven by flows and costs, not headlines.
Big Pressure on Aviation
Airline stocks felt the pressure quickly, with Lufthansa, Air France-KLM, Delta, Boeing, and Airbus posting significant downside gaps at the start of the following week.
The airline industry was hit from all sides. The increase in jet fuel prices directly affected the sector, and rerouting through Central Asia or Africa increased not only travel time but also fuel costs. This affected demand, while cancellations were reported on major routes.
Scenarios and Methods
In such cases, the market direction heavily depends on how the situation unfolds. The balance of escalation and de-escalation influences the risk sentiment, assets, and markets in the near term.
- Escalation – a long conflict over territory in Iran supports a risk-off scenario. The gold price makes new highs, oil prices are rising toward $100, and safe-haven currencies like USD and CHF are appreciating. The CAD is also appreciating because of oil prices.
This is seen in European and Asian markets, whereas the US markets are more resilient.
- De-escalation – a quick resolution of the situation leads to a de-escalation. The oil price falls back toward $67-68, and the US and European markets start to recover, especially in the tech space.
The USD depreciates as defensive plays unwind, supporting the EUR and GBP.
Risk of Stagflation
The underlying concern is not oil prices at $100 in isolation, but rather oil prices at $100 and slowing global growth.
All of the elevated oil prices, logistical challenges, and financial market conditions are, in our view, creating a stagflation-like scenario in which gold performs well, value beats growth, and bond volatility is at the core of all asset-class correlations.
Trading Expectations
Markets were influenced by tanker flow updates and signs from Beijing. If gold plateaued while escalation continued, that suggested the risk was already being priced in.
Tactical positioning remained dominant. The gold hedge required tight risk control. Any moves higher in US indices were seen as opportunities to re-enter shorts, in line with risk-off positioning.
The USD remained supported by defensive positioning, putting pressure on major FX. Oil retained an upside bias in the event of further escalation, with attention on OPEC and the SPR. Airline stocks remained weak and were best avoided.
CNH remained a key macro indicator. If it continued to weaken, that suggested slowdown risks were being priced in.
