Equity markets on Thursday seemed remarkably indifferent towards the news this morning that two oil tankers had been torpedoed in one of the worlds most important shipping lanes in the Middle East. The oil price jumped sharply on the news. US speculation was that Iran behind the attack though no one has claimed responsibility.
Equity investors seem more and more to immune to geopolitical risk, perhaps as we have been living with it for so long. Torpedoing ships could be considered an act of war. The second time in the space of 30 days that tankers have been attacked. Speculation these attacks are as a consequence of the US pulled out of a deal last year between Iran and global powers that aimed to curb Tehran’s nuclear ambitions. Iran has warned it will close the Strait of Hormuz.
The last thing the global economy needs as it slows partly as a result of trade wars is a spike in the oil price. When there is a spike in the oil price, it inventively harms the global economy. It slows consumer spending, pushes inflation higher. Not an environment that central banks can cut rates. Bond yields did fall further today. The Vix index fell, no fear there then. Gold has been rising recently, and that rise continued today on the back of the Middle East worries. One other measure o risk aversion is the movement of the Japanese yen relative to the US dollar. The yen is considered a haven, rather as Gold is, and like Gold has been rising in the past few days.
It will not be surprising if the tensions between Iran and the US don’t at some stage give equity markets more of a scare. For now, inflation remains muted according to the latest Consumer Price Index. The odds on a rate cut in July keep on rising, now at 85%.
The finding of the next leader of the Conservative party started in earnest on Thursday as three hopefuls were voted out of the running, leaving 7. Boris Johnson is looking more and more like it is his to lose as he polled more than twice the votes of the next man, Jeremy Hunt. It could be a straight battle between a Brexiter in Boris and a Remainer in Mr Hunt.