Oil Prices Rally as Gulf Missiles Escalate Market Tensions and Policy Risks
Market Reactions and Policy Implications Amid Gulf Escalations
A look at the day ahead in European and global markets from- Wayne Cole.
Escalating Tensions in the Gulf Region
The week started with a bang in Iran as U.S. forces struck two missile launchers on Larak island in the Strait of Hormuz, while Tehran attacked U.S. forces in Jordan. Not helping was a post from President Trump that Kharg Island, Iran's main oil terminal, was being "blown to smithereens", though there was no confirmation of this from the military.
Strategic Challenges in the Strait of Hormuz
Seems Iran did try to use rockets to lay naval mines in the strait, a challenge to the U.S. military which claimed last week that it had cleared the main passage for shipping.
Problem is, Iran can keep doing this regularly and from anywhere on the shore, suggesting it will be tough for the U.S. to keep the strait clear. Thus Brent quickly climbed 2.4% to back above $90 a barrel, pressuring equity markets.
Oil Shipping and Export Dynamics
Yet, there are signs U.S. efforts to escort shipping are bearing fruit with Goldman estimating total Gulf oil exports are running at 15-16 million bpd, 7 to 8 million below pre-war levels, but 5 to 6 million above the March trough. Talk is the ships are travelling at night with their transponders off, and thus not being spotted by ship tracking sites.
Global Policy Responses and Market Impact
Meanwhile, President Trump said oil from a recently struck deal with Venezuela will be used to replenish the Strategic Petroleum Reserve, which seems optimistic given analysts assume it will be years - if ever - before production could be meaningfully increased.
Anyway, most stock markets are in the red across Asia, while European and U.S. share futures are off 0.4% to 0.5%. Japanese bond yields followed Friday's selloff in Treasuries as 10-year yields again hit their highest since 1996.
Central Bank Actions and Rate Hike Expectations
Markets imply a 70% chance the Bank of Japan will hike when it meets on September 18, with Treasury Secretary Scott Bessent offering some not-so-subtle encouragement.
It's a busy month for policymakers. New Zealand's central bank is seen certain to hike its rates for a second straight meeting on Wednesday, while the Bank of Canada is expected to stay on hold, given the damage a trade war with the U.S. could do to the economy.
Markets are wagering heavily on a hike from the ECB at its meeting on September 10, while implying a 58% probability the Federal Reserve will pull the trigger on September 16.
Upcoming G20 Meeting and Key Economic Data
Rates, bonds and inflation are likely to be high on the menu when G20 finance ministers and central bankers meet in North Carolina on Monday and Tuesday. Markets assume the tone will be hawkish with oil at $90 a barrel and no end in sight to the Gulf conflict.
Key Developments to Watch
Key developments that could influence markets on Monday:
- German CPI, HICP for August
- G20 finance ministers, central bankers meet
(By Wayne Cole; Editing by Jacqueline Wong)
