When I look at the Israeli stock market, it is hard to see any signs of war pressure in this market. In fact it is at all time highs.
The Economist has a good article on why Israelis would feel so secure. Iranian offensive ability has been severely degraded, with not only the amount of munitions being launched by Iran falling, the numbers actually making through falling precipitously. They have also resorted to mainly drones from missiles, which are far less powerful.
Israeli does import oil but is self sufficient in natural gas production. The Israeli market fell in 2022 after Russian invasion of Ukraine and spiking energy prices, so market action today seems to reflect a much better security position for Israel. But if Iran is a spent force - why is oil up another USD 12 today?
Clearly, Iran is still able to disrupt shipping in the straight of Hormuz. The question is how long can it do so? Tricky question, but there is some precedent. When Russia invaded Ukraine, it effectively closed off Ukrainian grain exports via the Black Sea. Eventually Russia agreed to some exports, but then withdrew and promised to target any ships carrying grain. Ukraine was still able to export grain through the use of drone and missile attacks on Russian assets. Wheat spiked when the invasion started and then collapsed.
The point of this analogy, is that assuming that the Straits Of Hormuz will be closed for an extended period seems to me to be a very poor bet to make, if Russia was not able to stop Ukraine from exporting grain, why would you think Iran would be able to close this Strait against the military might of the US and Israel for a prolonged period of time?
What I am far more concerned with is that the oil spike creates GFC conditions again. Spiking oil from 2006 to 2008 caused monetary policy to be tightened.
Which then caused credit market to implode and credit spreads to blow out.
Which ultimately created a “DEFLATIONARY” event, which ultimately means the only safe asset is government bonds. That is the question I really worry about. And even post GFC, long bonds and short equities worked well in various deflationary events, like the cratering of the Shale patch story, or fears of Chinese devaluation. But since Covid, the market has said that government policy is set towards inflation. So far 30 year JGBs continue to indicate is an inflation market.
Japan 10 Year JGBs are saying the oil shock is less of a shock that the Trump tariffs in April last year.
To my mind, and as Israeli stock market shows, inflation still is the main trade, which is not necessarily bad for equities. I certainly have a mixed views on equities. But the one assets class that still looks wrong is government bond yields. Why lend to the US government for 30 years at 4.7%? Or Japan at 3.4%?
I am not sure how other people are positioned, but I still can’t see a better way to think about things that seeing a world of rising cost of capital. I think the big problem that Iran has with closing the strait of Hormuz is that it ushers even more “non-carbon” and non-Middle Eastern energy supply on stream, which weakens their strategic bargaining power even further. The OPEC shock proved the power of the Middle East and Soviet Union in the 1970s, I cannot help but feel feel that the 2020s oil shocks are likely to prove the exact opposite.
