14th July - The Blockade Is Back
- 2 days ago
- 6 min read
Yesterday was a blockbuster day for geopolitical news, thanks mainly to one man. Trump announced on Truth Social that the US will be reinstating the Iranian blockade, effective today. He also claimed that the US "will be reimbursed, at the rate of 20% on all cargo shipped, for any and all costs necessary to do the job of providing safety and security to this very volatile section of the World."
This is exactly what Trump had considered unacceptable from the Iranian side, and on the surface, it goes against the Oman & IMO-backed navigational fee proposal we cited yesterday as a potential way out for both sides. This is surely something Iran could not consider; it would be a humiliation to the Iranian regime, though this may be the point.
Ignoring the fact that blocking an international waterway and then charging a fee to pass is almost certainly against international law for a moment; realistically, no shipper, insurer, or government would be willing or able to pay a full 20% levy on anything flowing through the Strait. To me, this smells a lot more like Trump's normal tactic of an extreme opening suggestion before a more reasonable and agreeable solution is found down the line. It may be, therefore, that the Oman-suggested solution is actually more likely today, as this would then be the more reasonable option that more parties could get behind as opposed to the oppressive 20% levy Trump has suggested.
On the back of the escalations and re-imposition of the US blockade, oil reacted yesterday. US Oil was up 5.8% yesterday and Brent up 5.1%, with both up a further 2% as of writing this morning. The market has seen the escalation and rhetoric but saw it as negotiating tactics, but the physical imposition of the blockade has been the catalyst for markets to take the escalations more seriously. We then need to add on top of this the fact that the license that had been granted by the US to allow Iranian oil back on the market expires at the end of this week after being pulled back from the original 60 days. No new transactions have been allowed since the 7th of July, but the 17th of July is the final day that any pre-agreed transactions can be completed. This will further restrict the oil market and will only continue to push prices up if we do not see a breakthrough.
We have today's CPI print, which as of last week was going to be a key signal as to whether lower oil prices were reflected in inflation figures, with the consensus being that it would signal the FOMC to move a little from their hawkish stance last month. The new developments with oil may now mean that markets are already looking past today's CPI and anticipating a higher than expected figure next month, thus raising the chances that the FOMC sticks to their hawkish guns. Today's CPI will still be hugely important, but the developments over the past few days may change the narrative somewhat. A more dovish figure may have less of an impact, as markets will look to a higher than originally expected figure next month to counter the effect. If we see a hawkish figure today, however, it could have a far larger impact than it otherwise would have as markets panic over inflation and rate-hike fears. The situation this week may well have created an asymmetric risk profile for today's release.
Forex
The DXY rose 0.5% from its intra-day lows yesterday on the news from the US, once again moving back into the 101s and looking to move higher as the uncertainty remains around the Middle East. Interestingly, the CHF was the largest mover of the day, losing a huge amount of support and seeing the USD/CHF rise a full 1% on the day. The CHF is normally a safe-haven currency, so in times of uncertainty, it should catch a bid, but yesterday saw nothing but selling. The SNB currently has rates at 0% with Swiss inflation at just 0.1-0.3%, meaning the increased risk of rate hikes in the US and no rate hikes on the horizon for the CHF is set to make the rate differential between the currencies even higher. On top of this, Switzerland is an energy importer, meaning its economy will be hit far harder than others with higher oil prices. As a result, the normal safe-haven status for CHF has been completely wiped out; like precious metals, it is now caught up in the rate-hike channel with no easy way out.
Yesterday, the JPY gave up all its gains from last week, seemingly in the same situation as the CHF and not receiving any safe-haven demand. We are once again close to a level of intervention, with the potential for today's CPI print to push the pair to new recent highs and once again force the BoJ's hand into a decision.
The CAD continued to see support from rising oil prices, while the AUD and NZD fell off a little as markets continued to move risk-off. The EUR and GBP were silent partners yesterday, with moves in other currencies having a far greater impact on their pairs.
Indices
Yesterday I wrote that the balloon deflation thesis "may not be dead; it may just be taking a breath." Yesterday the thesis had a fresh breath of life, pushing itself back to the front in just a single session. The S&P fell 0.7%, the Nasdaq fell 1.7%, but the Dow only fell by 0.2%, reversing the trend of the past few days in outperforming the more tech-heavy indices. I think it is a little difficult to draw longer-term conclusions from just one day, especially one with such geopolitical volatility, so we will need to see over the next week or two if the growth-to-value trade is back in play after a week or so where it looked less dominant.
One thing worth noting is that SK Hynix, a South Korean semiconductor company, fell 9% yesterday after rising 13% on its Nasdaq debut last Friday, mirroring on a shorter timescale the fate of SpaceX, which is now trading below its opening price. Coupled with Samsung's price drop despite blowout earnings, we are seeing a pattern of tech/AI stocks struggling and proving that the AI complex is struggling to hold a bid on good news. With earnings season around the corner, the mega-cap tech stocks will be even more closely monitored, and only extreme beats seem to be able to move the market higher. The Nasdaq, in particular, is forming a wedge pattern on the daily chart; it seems as though pressure is building in advance of something, with the chance that an unexpected release or news event could cause a significant move in one direction or the other.
Precious Metals
Metals closed down on the day, with gold down 2.2% and silver down 2.25%. The mechanism for this is the same as it has been since the start of the war; rate-hike concerns push metals down as the non-yielding assets look less attractive by comparison. The safe-haven demand aspect for metals can now be completely dismissed until the Iran war is over, as any increased uncertainty will affect oil prices and will push concerned investors to USD, not metals.
The only way metals will see support in the short term will be to see hostilities cease and inflation expectations fall. In a dream scenario for metals, we would see a soft CPI print today and hear word of a final deal being reached over the management of the Strait of Hormuz, but until at least one of these things happens, metals are in for a tough time.
Today's Key Market Drivers
US CPI, 1:30 pm UK time - A hugely consequential data release, made more interesting by recent oil price rises. One to be in the markets to watch and to make sure you are not exposed to the volatile spreads we will see around the release.
Warsh testifies before Congress, 3 pm UK time - Another key event, this could either prove explosive or be a damp squib. I would expect to hear Warsh stay vague and opaque with his commentary as he did last month, but anything unexpected will be a market mover.
Big Bank Earnings - JPMorgan, Goldman, Bank of America, Morgan Stanley are all up for their earnings releases. Strong figures could back up the growth-to-value capital moves we have been seeing reintroduced today.
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