One month after the start of the war in Iran, as the prospect of a lightning operation fades, the markets are beginning to envisage a protracted conflict, the consequence of which for the markets boils down to one inescapable implication: high oil prices = high interest rates and falling share values. All asset prices now depend on shipping conditions in the Strait of Hormuz and oil price levels. As one US fund manager put it so well: ‘whether we’re talking about Apple or the US 10-year bond, in the end we’ve all become oil traders’. The recent developments have served as a reminder that it is often harder to extricate oneself from a conflict than to enter one in the first place. The pain thresholds of the belligerents are often underestimated; Trump, elected on a platform of non-interventionism, is now embroiling his country in a major conflict… In short, it seems impossible to predict a date for a resolution of this crisis. However, a few viewpoints are becoming more obvious every day. The first concerns the US president’s pain threshold; and the fact that this threshold is (cynically speaking) more closely correlated with the price of oil and the 10-year US Treasury yield than with anything else, so the 1970s scenario should be avoidable. That such a scenario might be ‘priced in’ by the markets cannot however be ruled out entirely, and there would undoubtedly as such be entry points created. As for our second viewpoint and a longer-standing conviction, the current situation (sadly) confirms that the sharp rise in commodity prices observed more than a year ago is surely set to be a long-term trend. We are discussing these topics in the newsletter.
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