US and Asian markets have climbed to new record highs this week, on hopes that the US will agree a peace deal with Israel to allow the Strait of Hormuz to reopen:
At the time of publishing, the US and Iranians both agreed that the ceasefire was holding despite an overnight exchange of fire. Negotiations are said to be ongoing around a potential settlement.
Commodity prices have fallen this week as fears of a supply crunch have eased (slightly), with Brent Crude dropping below $100 a barrel:
Press commentary has suggested that President Trump is feeling newfound urgency to bring an end to the conflict, which has lifted average petrol prices above $4.50 a gallon in the US. That’s likely to be unpopular with voters as the country heads into the summer driving season and could harm the Republicans in this year’s mid-term elections.
More broadly, projections suggest that commodity shortages could start to have more serious effects on the global economy if the Strait of Hormuz remains closed into June.
Global oil reserves fell at a record rate of 6.6m barrels a day in April, or around 200m barrels in total. This has happened despite a fall in energy usage; global oil consumption is now said to be around 5m barrels a day below pre-war levels.
The implied supply shortfall is 11-12m barrels a day – equivalent to more than 10% of pre-war global daily oil consumption. Such a large reduction in supply cannot be absorbed for too long without consequences.
If the disruption continues, shortfalls could become harder to manage and have a deeper impact than seen so far.
UK borrowing costs surge
Closer to home, the Middle East conflict has combined with economic and political uncertainty to push up borrowing costs for the UK government.
The yield on UK 30-year gilts topped 5.7% at one point this week, while the yield on 10-year Gilts is approaching 5%:
A local election washout for Labour could also add to domestic volatility if the results heighten speculation about the future of Prime Minister Keir Starmer. At the time of writing it’s clear Labour has suffered significant losses, but too soon to know whether there will be any…
