Growing fears of a protracted conflict in the Middle East are threatening equity markets, fuelled by concerns that rising energy prices will trigger widespread inflation. Fresh missile and drone strikes have intensified fears of disruptions in the Strait of Hormuz, a vital shipping lane for global crude oil, causing tanker traffic to halt. The S&P/ASX 200, for example, declined 1.2 per cent to 8831.8 on Friday morning, marking a 4 per cent drop from its record high of 9200.9 on Monday.
Global benchmark oil surged 5 per cent to $US85.41 a barrel on Thursday, extending this week’s gain to 20 per cent, with US oil spiking 8.5 per cent to near $US81 a barrel. These levels represent the highest since July 2024. SPI Asset Management warns that persistently elevated crude oil prices could lead to rising inflation expectations and a wobbling growth outlook, potentially morphing into a combination of slower growth and rising inflation.
The surge in energy prices has impacted US bond markets, prompting traders to reduce expectations of interest rate cuts by the Federal Reserve. Yields on two-year notes have risen approximately 20 basis points this week, reaching nearly 3.6 per cent. Fortlake Asset Management notes that bond yields are reflecting concerns of a structurally undersupplied oil market, which could ultimately contribute to underlying inflation.
In Australia, rising bond yields have increased bets that the Reserve Bank will continue to raise interest rates. The three-year bond rate reached 4.43 per cent, the highest since early November 2023, with money markets now implying a 33 per cent chance the RBA will lift the cash rate in March and are fully priced for a move in May. Traders now anticipate a total of 57 basis points of rate hikes by Christmas.
