It seems the weather gods have decided that while our continental friends in Paris, Berlin and Rome deserve 30 degree sun, we in London should be punished with drizzle and temperature below 20 degrees. I think I was perhaps overly optimistic in thinking I could spend some time outside to slightly bronze my ghostly pale skin.
While the sun has been shining on equities with all major regions notching gains in local currency terms, energy markets have taken a battering with a geo-political storm beginning to pick up speed. Asset class returns in sterling and local currency are below; energy markets have made the headlines several times in recent weeks, with geo-political moves coming to the fore.
Table 1: GBP total returns
Table 2: Local CCY total returns
Global media’s focus has been drawn to geo-political developments following an attack on an oil tanker in the Gulf of Oman, the second attack in a month near the Strait of Hormuz, which has led to fears amongst investors that escalating hostilities could disrupt global energy markets. US Secretary of State Mike Pompeo made it clear that he believed Iran was to blame for the attacks, with the US president subsequently confirming this on Twitter. Though it was denied by Iranian officials, the US backed up its claims with the Pentagon releasing a video which it said showed Iran’s Revolutionary Guard removing an unexploded limpet mine from one of the ships.
Chart 1: The high concentration of crude oil tankers located in the red circle illustrates the importance to global energy markets of free passage through the Strait of Hormuz and the Gulf of Oman
As shown above, the Strait of Hormuz which is located between the Persian Gulf and the Gulf of Oman provides the only sea passage from the Persian Gulf to the open ocean and is widely described as one of the world’s most strategically important choke points. It is estimated that a third of the world’s liquefied natural gas and almost 20% of total global oil consumption passes through the straight, which puts into context the perceived threat of Iran attempting to block the strait in response to rising US-Iranian tensions.
The accusations of Iranian involvement in the tanker attacks are only the latest in a series of escalations in which US relations with Iran have deteriorated. The withdrawal of US involvement from the Joint Comprehensive Plan of Action (known as the Iran nuclear deal, or “JCPOA”) in 2018 was a key turning point in US foreign policy as the Trump administration sought to force Iran to alter its policies including support for militant groups and development of ballistic missiles. The accompanying economic sanctions imposed by the US have resulted in a significant fall in Iranian crude oil output which is shown below.
Chart 2: While Iranian crude oil production has fallen, the US has offset any supply imbalances by ramping up its own production
Source: Bloomberg, Department of Energy, US Energy Information Administration, Organisation of Petroleum Exporting Countries
The situation in the region remains hot, with the US announcing early this week that in addition to a carrier strike group already in the Gulf, it would deploying a further one thousand troops to the Middle East. In a statement, the Acting US Secretary of Defence Patrick Shanahan said that the US “does not seek conflict with Iran”, but the action was taken to “ensure the safety and welfare of our military personnel working throughout the region to protect our national interests”. Energy markets will be watching the situation closely.
THE WEEK AHEAD (G7 + China)
Monday: Eurozone Wage Growth, European Central Bank Forum on Central Banking
Tuesday: Eurozone Balance of Trade, Eurozone Inflation Rate, Germany ZEW Economic Sentiment, US Redbook
Wednesday: Japan Balance of Trade, Eurozone Current Account, UK Inflation Rate, Eurozone Construction Output, Canada Inflation Rate, US Fed Interest Rate Decision, FOMC Economic Projections
Thursday: UK Retail Sales, Bank of England Interest Rate Decision, Eurozone Consumer Confidence, European Council Meeting
Friday: Japan Inflation Rate, Germany Markit Manufacturing PMI, Eurozone Markit Composite PMI, Eurozone Manufacturing PMI, Markit Services PMI, UK Public Sector Net Borrowing, US Markit Manufacturing PMI, US Markit Services PMI, US Markit Composite PMI, Eurozone Euro Summit, European Council Meeting
STAT OF THE WEEK: 160 million – the number of women worldwide who may need to change jobs by 2030 due to automation (McKinsey).
Data correct as at: 14/06/19