Ahead Today
G3: US S&P PMI, Eurozone PMI
Asia: Thailand Trade, India PMI, Taiwan industrial production
Market Highlights
It was an absolutely wild trading session to start the week, as Trump announced that there were talks between Iran and the US, and that he is postponing military strikes against Iranian power plants for a five-day period. To partly illustrate the scale of the market move, Brent oil prices fell 15% at one point from US$113/bbl down to US$96/bbl, before trading at around US$100/bbl at the time of writing. All this comes after threats and escalation were traded over the weekend between both sides, with Trump saying he will hit Iran’s power plants if Iran does not fully open the Strait of Hormuz, while Iran raised the escalation ladder saying that full closure of the Strait of Hormuz and regional infrastructure in the Gulf would be legitimate targets thereafter.
So where next, including for Asia? We would remain cautious on the path forward especially for Asia’s currency and rates markets, both because of the substantial scale of economic disruption and possible physical energy shortages already arising from the Strait of Hormuz closure to our region, and also because of the difficulty of negotiations moving forward, even as the left tail risk of a destructive scenario has perhaps been avoided for now.
From Iran’s perspective, a rubicon has been crossed in the Strait of Hormuz, with a clear test case of how much economic disruption a Strait of Hormuz closure could bring, and that to actually disrupt traffic there higher insurance premiums and private sector risk aversion could do much of the job for Iran. As such, negotiations would very likely involve discussion around the control of the Strait for Iran given that it is such a powerful chokepoint and lever, perhaps much like rare earths and critical minerals was for China’s case. Whether different parties including the US and Iran, together with Israel and regional countries in the Gulf manage to come to a landing point remains to be seen.
Second, from Asia’s perspective, what matters is the physical flow of barrels, and over here time is of essence. Every week that the Strait of Hormuz is closed increases the risk of not just higher oil prices but also physical shortages of fuel across our region, given just how dependent Asia is on oil that flows through the Strait. As such, this is quite unlike what we saw during the 1990 Gulf war where there was effectively a quick resolution in terms of actual flows of oil barrels. We are already seeing some signs of fuel shortages across some countries in Asia, with sharp spikes in domestic fuel prices.