Markets are reacting to conflicting news about the situation in the Strait of Hormuz, but the lack of clarity is proving particularly frustrating for traders seeking to price in risk. For a second time, Iran targeted shipping that was transiting the Strait of Hormuz outside of its control, leading to US reprisals on its military installations. The market has become accustomed to flare-ups and uneasy implementation of the ceasefire.
However, US President Donald Trump’s comments at the start of the annual NATO leaders’ summit in Ankara, Turkey, initially set off alarm bells. He implied that the ceasefire was over, but he also said negotiations would continue. This mixed messaging was a theme of the NATO meeting, first starting with a list of grievances against the military alliance and then affirming commitments to mutual defence. Some analysts might attribute the comments to a negotiation strategy.
Did the Ceasefire Really End?
On Thursday, attacks between Iran and the US escalated, but did not reach anywhere near the level seen during the war. Neither side officially said the ceasefire was over, although negotiations are on hold amid the funeral of the former Iranian Supreme Leader Ali Khamenei. The funeral ends on Thursday, and was supposed to be a period of lower tensions.
Regardless of the political situation, the practical implications for the market are a sudden near-halt of crude ships transiting the Strait. The last time that there was a flare-up in tensions, the hostilities ended after a couple of days as the parties resumed negotiations. The relatively muted market reaction (stocks rose on Thursday as a sign of a risk-on attitude) suggests investors are betting the ceasefire deal is still on and that oil shipments will resume shortly.
Higher Crude Bump, China Trade Issue
Since the conflict began in March, the market has been adjusting to the interruption. The shift to alternate supplies has been quicker than following Russia’s invasion of Ukraine, as has recent experience with significant oil supply disruption. What that means is that even if the situation escalates back into full-on conflict, crude prices might not spike as high as they were in March.
On the other hand, a significant part of the shift has been China running down its reserves amid constrained crude imports. Even with waivers on seaborne crude from Iran, the nation has struggled to match its demand and keep the economy growing. Given the renewed tensions in the Middle East, upcoming Chinese data could be more important for the market’s risk perception, in addition to affecting commodity currencies.
China’s GDP and Trade Growing
Next week brings the release of key Chinese data, with economists largely in consensus that the Asian Giant has largely managed to keep growing despite the energy supply situation. First up is China’s Trade Balance on Tuesday, which is expected to show a surplus of $110 billion in June, up from $105 billion in May. The focus will be on whether imports kept up with exports, as that will be relevant for the terms of trade that support the AUD.
China’s Q2 GDP reading comes out on Wednesday and will be closely followed as the first major economy to report on the second quarter. The consensus is for China Q2 GDP to slow to an annualised rate of 4.7% from 5.0% in the first quarter. A larger drop could spook markets, and weigh on gold prices as well as the AUD.
