War-Induced Oil Shock Roils Global Stock and Bond Markets
What to go long and what to go short until this war with Iran is resolved.
Key Takeaways
Markets Hit as Energy Risks Surge: Risk-off is the operative word as investors are now second-guessing how long this war with Iran is going to last and, in the interim, how much damage what is left of the leadership (quite a bit, apparently) can inflict on the oil (and gas) markets. European markets are down more than -3% after yesterday’s -2.5% shellacking in the worst two-day drubbing since Liberation Day last April (and that is because the shuttering of QatarEnergy, the world’s largest LNG company which has been facing a barrage of Iranian drone attacks, sent the price of TTF gas (the European benchmark) soaring by nearly +50% yesterday.
Europe and Asia Hit by LNG Supply Shock: As is usually the case in military conflicts, as we saw early on after Russia waged war on Ukraine, it comes down to energy prices in terms of the shock waves to all corners of the financial markets. Iran has now threatened to close the Strait of Hormuz, one of the world’s most significant shipping lanes. This is the key economic choke point for Tehran and a way for the Allies to pressure President Trump to hasten this conflict. Much of LNG has been moved off-line and that has put Europe in the crosshairs as it now must compete with Asia for cargo supplies in the spot market. Global equities and bonds have extended their losses, and the U.S. dollar is surging, which is added “financial tightening” for the U.S. risk-on trade and the economy as well.
One-Sided Risks in the Short Term: Until this war is resolved, the risks are entirely one-sided in favor of higher crude prices — the geopolitical tail risk alone will likely ensure this happens over the near-term — which is why, for the global economy and capital markets, the timeline here cannot last much longer than the four weeks that has been bandied about by the Administration. Not the time yet, as an aside, to be buying any dips — the VIX may be at 26x, but it may have to approach Liberation Day levels above 50x before one can declare true capitulation (levels we have hit no fewer than twelve times since the mid-1990s and this typically is the most ideal time to start putting cash to work… unless this war with Iran is resolved first).
