Ahead Today
G3: US Durable Goods
Asia: Philippines CPI, Thailand CPI
Market Highlights
President Trump ramped up his threats ahead of a deadline he imposed for Iran to re-open the Strait of Hormuz or face further attacks on civilian infrastructure, while Iran rejected a ceasefire proposal. Trump said that the “entire country can be taken out in one night, and that might be tomorrow night”, while also reiterated his reference to targeting civilian energy assets, power plants and bridges. This was overall in reference to his previous ultimatum to Iran that expires at 8pm on Tuesday (Wednesday morning Asia time). Meanwhile, Iran rejected ceasefire with the US even as they acknowledged the exchanging of messages, saying that Iran is seeking a definitive end to the war instead of a mere pause. Iran’s Foreign Ministry spokesperson said a short-term détente without guarantees that the cycle won’t be repeated is something “no rational person would do”.
Overall, our continued assessment is that the path towards peace is narrow and unlikely, given the wide gap in expectations among the different parties in this war. While the US and Trump may want to seek a short-term end to this war, Iran’s view is that it does not want to return back to the status quo and indeed would want to use the Strait of Hormuz as a significant leverage to extract important concessions from the different parties, and that would also require significant pain imposed on the US in particular either directly or indirectly. While tactically speaking the war could eventually end from 3 key constraints – Munitions, Markets, and the Mid-terms, how we get there will be important including what the pain threshold is for oil prices to rise further from here. Last but not least, other key actors in the region including the Gulf states and also Israel also have diverging objectives with the US and Iran.
As such we remain cautious on the path for Asian currencies and risk assets moving forward, but note at least two important developments in oil markets and potentially positive ones notwithstanding continued uncertainty around how the Iran/Middle East conflict will develop:
1st: It seems tankers are now testing an alternative route to exit the Strait of Hormuz, by hugging close to the south of the SoH where Oman is rather than the north where Iran is and where tolls are reportedly paid through Qeshm Island.
The evidence suggests that a higher number of tankers have passed through in recent days, although to be clear the overall numbers still remain well below pre-Iran conflict levels and directionally this is more from West to East (exiting the Strait), rather than in both directions.
2nd: Iran over the weekend announced that Iraq is now allowed to ship oil out from the Strait of Hormuz. Taken at face value, this may mean 3mb/day of additional oil could now hit the market, but of course there are still many unknowns right now around how Iran is defining "Iraq oil". In addition, the binding constraint right now may still be shipping insurance and lack of tankers in the Strait and so in practice we may not get that theoretical bump in oil supply
Overall, our takeaway is that it is an improvement at the margin in terms of flows from SoH, and we should watch carefully for how these develop. For Asia however, even if the SoH were to reopen completely today, it will take some time for actual supply to come onstream and flow through, with some suggesting at least 3-6 months timeline, with petrochemicals the worst impacted.