LIVE MARKETS-The Iran war and the global economy

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THE IRAN WAR AND THE GLOBAL ECONOMY

With the major U.S. equity indexes trying to pull out of a five-week tailspin, markets are looking for signs of acceleration and deceleration in the broadening war on Iran to gauge the conflict's economic fallout.

Nigel Green, CEO at deVere Group, believes markets are underpricing the risk.

“Brent at $115 is being treated as a spike," Green says. "The data tells a different story."

"Prices are up close to 60% in a single month, options markets are actively pricing scenarios of $150 oil, and up to 20% of global supply has been disrupted through the Strait of Hormuz," he adds. "Those are not conditions associated with a short-lived shock.”

Not only are oil prices spiking in reaction to infrastructure damage and the stranglehold on the Strait of Hormuz bottleneck, but also a widening of the conflict - as targets expand beyond crude infrastructure and into industrial supply chains - is affecting aluminum prices, among other materials.

Green believes investors are operating under old assumptions.

“Markets are still conditioned by the past decade, where geopolitical risk created volatility but rarely sustained price moves,” he says. “Current conditions look closer to the 1970s in structure, where supply shocks fed directly into prolonged stagflation.”

Beyond those considerations, President Donald Trump's statements and threats are adding uncertainties to the mix, the note says.

"Political intent is now a central variable," Green says. "Comments about seizing assets, restricting flows, or controlling transit routes have immediate pricing implications.”

A separate note from Citi Research on the Middle East turmoil and its potential effects on the global economy assesses potential headwinds arising from different scenarios.

Noting that "the global economy is more resilient than in past decades due to its reduced energy intensity and increased flexibility," Citi's analysts warn, "more severe scenarios could drag global growth below 2%, push headline inflation above 4%, and stoke recession risks."

On a regional basis Citi says, "Asia, particularly Korea, Japan, and India, faces the most intense headwinds due to heavy reliance on imported fuel and direct exposure to disruptions in the Strait of Hormuz. Conversely, the United States and Canada are comparatively well-positioned as net oil exporters."

A look at the Brent premium (front-month Brent LCOc1 minus front-month U.S. WTI CLc1), illustrates this divide.

(Stephen Culp)

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