Daily Commentary

MarketMinder’s View: Whether the tentative two-week ceasefire announced Tuesday evening holds or not, look longer term. Businesses and markets are nothing if not relentless at navigating barriers to commerce (see tariffs with any questions). Given the uncertainty of seaborne traffic through the Strait of Hormuz, this piece looks at other historical “chokepoints”—and how maritime disputes over them resolved. Cutting to the chase: The bottlenecks didn’t stay that way for long as motivated parties found workarounds even as countries claimed “control” over the waterways. These provide potential starting points for Iran and the US to agree on a framework both sides find acceptable (since neither country ratified the UN Conventions on the Law of the Sea), like giving potential tolls a palatable branding—should both countries pursue a diplomatic end, rather than a military one. Yet even here, the longer-term economic implications are limited. “Saudi Arabia and the United Arab Emirates managed to circumvent the chokepoint to a limited degree via their bypass pipelines. Riyadh and Abu Dhabi are almost certain to double down, expanding those emergency conduits further. Kuwait would doubtless join forces with the Saudis to build its own bypass pipeline.” The upshot? “Iran’s stranglehold over energy supplies will therefore loosen over time. Five years from now, the Persian Gulf will have far better bypass options than it does today. No matter what the US and Iran agree over the future of Hormuz, the strait’s status will change. But the waterway will never be as critical to the global economy as it was when the fighting started six weeks ago.” Capitalism finds a way, which is one reason why global stocks rose—and energy prices fell—before the ceasefire and even after it immediately began looking tenuous. When in doubt trust markets, which are several steps ahead of headlines, looking 3 to 30 months out. Of course, the breaking news everyone is glued to may swing sentiment short term, but that doesn’t confer any long-term advantage. Investors fare better weighing future fundamentals.

MarketMinder’s View: The latest growthy data to be dismissed as pre-war are US durable goods orders, which revealed healthy and stronger-than-forecast business investment in equipment a month before the conflict broke out. “Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 0.6% after a downwardly revised 0.4% drop in January, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast these so-called core capital goods orders would increase 0.4% after a previously reported 0.1% gain in January. There were increases in orders for primary metals and fabricated metal products. Orders for machinery jumped 1.5%. Orders for computers and electronic products were unchanged as an increase in the computers and related products category was offset by a decline in communications equipment. Orders for electrical equipment, appliances and components dipped 0.1%. Core capital goods shipments increased 0.9% in February after being unchanged in January. These shipments are among the components that go into the calculation of the business spending on equipment component in the gross domestic product report.” It all suggests the economy was on fine footing before the war, which likely hasn’t changed conditions as much as commonly feared. This piece, rather unusually, hints at that in quotations from an economist who notes businesses may have temporarily retrenched from investment, but it really amounts to a blip. But the common view is war-fixated, which widens the gap between reality and expectations, likely facilitating positive surprise ahead.

MarketMinder’s View: We highlight this story about the Philippine consumer price index jumping from 2.4% y/y in February to 4.1% in March—far above estimates and just north of the central bank’s 2% – 4% target range—for two reasons. (For what it is worth, prices excluding food and energy rose slightly, too, from 2.9% y/y to 3.2%.) One, it illustrates market efficiency. Why? Southeast Asian Emerging Markets like the Philippines import almost all their oil—and are among the most reliant on Middle East suppliers. With the Strait of Hormuz shut, the prices from these typical suppliers are spiking even more than global benchmark prices, making these nations particularly hard hit. But here is the thing: Markets already knew this. That is largely why the MSCI Philippines Index tumbled -15.4% from the outbreak of war through the MSCI All-Country World Index’s low to date on March 30, which ranks 39^th of 47 constituent countries (data per FactSet). But also, and sensibly, this shows the central bank has held rates in spite of the expected rise in headline prices, noting their influence over supply shocks is limited. That modesty is a plus and limits the likelihood of excessive tightening, which could present an unwelcome hit to credit.