Daily Commentary

MarketMinder’s View: This piece runs through several potential second-order effects of the Strait of Hormuz’s blockage, warning they are already in motion and will bite developed world economies over the next several months—hitting the UK particularly hard—even if the Strait opens soon. Those include shortages of jet fuel, fertilizer and chemicals along with a higher risk of global shipping bottlenecks if countries bordering other chokepoints decide to get adventurous. While that last one seems far-fetched, as it rests on offhand comments from a single Indonesian official that the government immediately dismissed, the others are reasonable things to keep in mind. While most attention centers on the Persian Gulf’s oil and natural gas exports, the region is also a key source of fertilizer and chemicals, both of which are gas byproducts. Shipping blockages today will probably work their way through the supply chain gradually. However, it seems a bridge too far to extrapolate severe economic trouble from this—particularly severe trouble markets haven’t already discounted, as these issues are well known. We have seen this movie before, though few recall it now. In 2022, when Russia invaded Ukraine, it triggered supply fears beyond oil and gas. There were grain shortage fears. Headlines warned the noble gases used in semiconductor production would be in short supply, given Russia and Ukraine were key suppliers. That was going to cause a massive global chip shortage, allegedly. And fertilizer and chemical concerns loomed large, too, especially with gas shortages threatening Germany’s chemical plants. And what happened? Seeing these potential looming roadblocks, the world adapted. The widely feared global food price spike never occurred. Semiconductor producers adjusted. In this case, even if the Strait isn’t opened, workarounds like shipping via truck will help to mitigate the issues. That same resilience is alive today, likely rendering the worst fears false.

MarketMinder’s View: Following the Reserve Bank of Australia’s lead, Norway’s central bank (the Norges Bank) hiked its policy rate from 4.00% to 4.25% Wednesday, the first hike since the global cycle in 2023. It is a curious and potentially wrongheaded move, in our view. The bank cited several factors, including above-target inflation, a tight labor market and uncertainty over the Iran war’s effects on the economy and inflation. On the latter, Norway is a beneficiary of higher oil prices, as the energy-heavy economy is among Europe’s chief suppliers of oil and gas. This is a main reason why Norway was among the world’s best-performing equity markets during the war-driven mini-correction. Now, you may say the bank is perhaps looking beyond the energy industry to mainland Norway’s economy. Fine. But here is the thing: With Norwegian 10-year bond yields at 4.41% (per FactSet), hiking rates to 4.25% means you have among the world’s flattest yield curves. Since banks borrow short-term to lend long—making the spread a proxy for new loans’ profitability—this dissuades lending and credit creation, which would largely put the brakes on non-energy industry investment and hamper the economy’s growth. It is a counterproductive move. As for the rest of the rationale, inflation has been above target for years, as the article admits. Wage growth also matched the bank’s estimates. So that part of the rationale looks like cover for a curious, war-driven decision. Now, Norway is a tiny economy and the effects of one hike there—or even several—are likely limited, globally speaking. But central banks often act in concert and we are watching decisions like this closely as a result.

MarketMinder’s View: By now, many may be aware “Saudi Arabia and the United Arab Emirates [UAE] have diverted a sizeable portion of the 20mn-plus barrels a day of crude that previously transited Hormuz by maxing out existing pipelines.” For example, the former’s East-West pipeline is now handling seven million barrels per day (mbpd)—about 70% of daily production—more than doubling from two mbpd (or less—some reports put it at 800,000 bpd) pre-war, while the UAE is looking “to enlarge Abu Dhabi’s pipeline to Fujairah, outside the Strait of Hormuz” (and pump even more now that it is also outside OPEC). The eventual result: “Completing all planned oil links would lift Hormuz ‘bypass’ capacity from 40 per cent to perhaps two-thirds of prewar flows—enough to make a future closure less calamitous.” But that isn’t all: “for the one-fifth of global liquefied natural gas, mostly from Qatar, that transited the strait ... exporters are improvising workarounds and fast-tracking new connections. Plans are being dusted off for gas pipelines from Qatar to Turkey via Saudi Arabia, Jordan and Syria, or through Saudi Arabia, Kuwait and Iraq, and another to Egypt.” Then, beyond oil and gas, “other commodities, often reliant on specialised port terminals and container shipping, are being transported instead by rail and truck to Omani and Red Sea ports [with] expanding capacity at ports away from the strait, accelerating rail links and potentially building dedicated chemical pipelines.” This won’t happen overnight, but it does mean energy and commodity transportation is becoming more stable longer term. All this goes to show what global stocks spied well before a potential peace deal was making headlines: Regional conflict typically doesn’t disrupt for long—reality 3 to 30 months ahead is likely better than many currently fathom. As for the rest of this article, which advocates launching similar projects to address “the vulnerability of other maritime chokepoints” (e.g., the Red Sea’s Bab al-Mandab Strait, the Southeast Asia’s Malacca Strait and East Asia’s Taiwan Strait), it is a matter of opinion whether that is “an economic and geopolitical necessity.” We suggest not getting bogged down with such speculation from an investment standpoint, as markets move most on probabilities, not possibilities. This largely seems like an early example of investors fighting the last war, in the sense they are applying Hormuz logic to other places.