Global Market Outlook - The clock is ticking, but Trump may have time to buy

Markets have decided to look through the Iran conflict with equities reaching new highs, but the Strait of Hormuz remains closed. The longer it takes to re-open, the more challenging it will be for the market narrative to continue.

Markets rebounded strongly in April, with global equities up over 9% in local currency terms over the month. And with US equities now up over 14%, and from a technical standpoint looking very overbought, the question becomes whether this justifies a medium-to-long term bullish stance or should be viewed more as short covering.

We have no foresight when it comes to ending the conflict in Iran. We have stated from the start of this conflict that all eyes will be on the Strait of Hormuz. We need to see the boats pass and the oil flow for us to put this conflict behind us. Any rhetoric or deal that does not see the Strait reopen is not one that helps the global economy. The longer the Strait remains closed, the more energy shortages the world will face, the higher inflation will go, the more consumer spending will be impacted and the higher the chance of a stagflationary shock that rivals 2022.

Each day the Strait is closed, the bigger the downside risk (for some more than others)

This is not our base case, but the downside risk remains while the Strait remains closed. The longer it remains closed, the more damage will be done. The clock is ticking.

That said, indications that the US and Iran are engaging are positive and the bombs have stopped falling for now. However, the ceasefire is a fragile one, and the two sides continue to play a game of chicken to see who will capitulate first. Iran continues to block the Strait, causing higher energy prices and inflation around the world, damaging Trump’s mid-term election odds and putting economic pressure on US allies. But the US is also blocking the Strait, choking off revenue to the regime (US$500m a day according to Trump) while the US Treasury undertakes Operation Economic Fury, freezing Iranian funds around the world. Reports say that salaries have not been paid in Iran (although hard to verify) showing that the economic pressure is real. Therefore, we believe both are pressured to come to the negotiating table, but time could be on Trump’s side.

From a regional perspective, the US is the least dirty shirt. Their relative energy independence puts them above their regional peers. In April, the US exported a record of 5.2 million barrels of oil per day and also hit a new high of liquified natural gas (LNG) exports. While the US has not invested in sustained supply to help keep this trend going, it has shown their resilience and even ability to benefit during this current crisis. While it is incorrect to say the US has no exposure to the Strait of Hormuz (they imported 0.4 million barrels a day through the Strait pre conflict), they will not suffer nearly as much as their European or Asian allies. Even though we have not seen the inflation impact in the data yet, we are seeing input prices rise in both manufacturing and services PMIs, with Europe and Australia being impacted more acutely, whereas the US and China remain somewhat insulated.

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