As we enter the fourth month of the conflict, it’s clear that the near-total closure of Hormuz has rewired global oil, fuel and LNG flows. For more on that front, take a look at these six key charts tracking how the crisis has reshaped energy and shipping sectors.
For equity investors, the news out of the Gulf remained mostly background noise, with chip stocks largely responsible for keeping the party rolling in both the U.S. and Asia.
Two more chipmakers, Micron Technology and South Korea's SK Hynix, hit $1 trillion in market value this week, joining Samsung Electronics in this growing club. Samsung also saw its shares surge after its workers approved a pay deal that would avert a massive strike and award some of them supersized bonuses.
Somewhat remarkably, the S&P 500 has climbed more than 9% since the start of the war, with Goldman Sachs on Wednesday lifting its target for the index from 7,600 to 8,000 by year-end, citing strong corporate earnings.
But if anything can spoil the fun, it will likely be rising borrowing costs. While Treasury yields have fallen modestly this week on hopes for a reopening of Hormuz, they are still up meaningfully since the outbreak of the conflict, with the benchmark 10-year yield up nearly 50 basis points since February 28.
In the past few months, yields have mostly risen in tandem with resurgent stocks, but an inflection point could be on the horizon. Some models suggest that if borrowing costs creep upward again, they could soon cross a point where equities will start to suffer.
And there are plenty of reasons to believe higher borrowing costs could be in the cards. The Personal Consumption Expenditures (PCE) price index – the Federal Reserve's preferred inflation gauge – jumped 3.8% in April, nearly twice the Fed's target, largely due to the energy price spike.
Even if a 60-day deal is reached in the Middle East and the strait is reopened, crude prices are unlikely to fall back to pre-war lows anytime soon given the physical damage in the Gulf and the need to replenish inventories.
This could cause a headache for newly appointed Fed Chair Kevin Warsh, who was expected to push for lower interest rates this year.
Fed futures are pricing in at least one rate rise over the next year and Fed policymakers are sending increasingly hawkish signals. Governor Lisa Cook said on Wednesday that she was prepared to raise rates if inflation didn't ease, while erstwhile dove Christopher Waller urged the removal of the apparent "easing bias" in the Fed’s latest statement.
Even President Trump – who has made no secret of his preference for lower rates – appears to acknowledge that the macro reality has fundamentally changed. He has recently rowed back his calls for immediate rate cuts – at least for now. The president has indicated to Warsh that he should act as he sees fit, telling him at his swearing-in ceremony that he should be "fully independent".
If this change in tone persists, it could signal a shift in what many believe to be the administration’s soft dollar policy, as the greenback is unlikely to weaken in a more hawkish environment.
Elsewhere, rate hikes are expected in the euro zone and Japan as soon as next month. ECB board member Isabel Schnabel told Reuters on Tuesday that the central bank should raise rates in June even if a U.S.-Iran peace deal is reached, owing to the size and persistence of the current energy shock.
In corporate news, BP shocked the energy industry on Tuesday by ousting Chairman Albert Manifold for alleged aggressive conduct less than eight months after he joined. That comes within three years of CEO Bernard Looney's dismissal for improper relations with colleagues. These repeated leadership scandals suggest the British energy giant's board is quickly becoming a liability.
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