On Wall Street, the S&P 500 and Nasdaq closed at record highs gaining 0.6% and 1.5% respectively, after Trump extended the ceasefire with Iran and amid an AI/tech rally. For a nation currently at war, the market, by the numbers, looks remarkably calm. But zoom out, and the picture changes completely.
The closure of the Strait of Hormuz - which currently is blocked by both Iran and the US, was deemed as the “greatest threat to global energy security” by the International Energy Agency”. Through the conflict, Brent Crude Oil peaked at $120/barrel - the highest since the start of the Ukraine/Russia conflict where it briefly hit $130 per barrel. Since the Strait is responsible for 20% of the global flow of oil, it collapsed energy markets around the world.
The countries actually feeling it
While the US celebrates their record-closing equity markets, the rest of the world, in particular emerging markets in Asia are feeling it. The Philippines, which sources 90% of its oil from the Middle East, declared a state of national emergency in late March, with reserves of diesel down to just 46 days. Pakistan imports 99% of their liquid natural gas (LNG) from the UAE and 40% of its energy from the Middle East.
While clearly highly susceptible to a global energy crisis, there was almost no way to predict this conflict. These nations have had to seek drastic measures including closing universities, schools and Sri Lanka even declared every Wednesday a public holiday to conserve fuel.
So why are US markets unfazed?
Well, it’s not the first time there has been serious volatility within Trump’s second term with last year’s ‘Liberation Day’ tariffs testing markets. Investors are treating Trump’s management of the conflict like his tariff negotiations, where he increases the uncertainty and then lowers it on cue. Analysts from Deutsche Bank drew parallels to early 2022, when optimism about a quick end to the Ukraine War was followed by a significant decline in the stock market.
The US produces most of its own oil, so while Americans are still seeing higher prices at the pump, the shock is more moderate than in import dependent economies and crucially supply itself was never threatened the way it was for countries dependent on the Middle East for 90% of their energy.
Impact on Australia
Locally, unleaded 91 petrol has dropped close to pre-war levels, averaging 192.7c per litre nationally. But diesel remains nearly 50% higher than what it was, which matters more than petrol for most Australians, even if they don’t realise it. Diesel prices are essential for transportation and most supply chains along with heavy machinery used in the farming and mining industries. Australia's fuel reserves have actually improved, rising from 36 to 46 days' worth, but with the strait still largely closed, the buffer remains thin.
The US market represents only a fraction of the total global equity landscape. The ceasefire has brought optimism for investors on Wall Street but without ships moving through the Strait again, the rest of the world, including Australia are running out of time.
