Oil prices are poised for a significant rally, while the Australian sharemarket anticipates a turbulent start to the week following Iran’s unexpected reversal on the reopening of the critical Strait of Hormuz. After initially announcing the shipping channel’s reopening, Iran abruptly reversed its decision over the weekend, citing continued US blockades of its ports. The Strait of Hormuz is a crucial artery through which one-fifth of the world’s oil shipments travel. National Australia Bank’s head of currency strategy, Ray Attrill, noted, “Markets have got no choice but to react badly to that,” emphasising the impact on oil flow.
This shift in geopolitical dynamics is expected to push Brent crude prices higher, reversing Friday’s 9 per cent fall that saw it dip below $US90 ($125) a barrel. Since the war began eight weeks ago, oil prices have already surged by one-third, fuelling fears of global inflation and a looming recession. For Australian equities, while a rally in oil prices may benefit energy stocks such as Woodside, Santos, and Beach Energy, the broader outlook remains clouded by the ongoing Middle East conflict. The risk-sensitive Australian dollar is also projected to fall, wiping out recent gains despite having climbed an impressive 7.4 per cent this year, largely due to interest rate differentials.
In response to the expected oil shock and resurging inflation, the Reserve Bank of Australia has already lifted the cash rate to 4.1 per cent this year, with markets implying an 80 per cent chance of a further increase next month. Traders anticipate the central bank will raise borrowing costs twice by November, taking the cash rate to 4.6 per cent, while the US Federal Reserve is expected to keep rates on hold. NAB’s Attrill noted that market sentiment regarding the Australian dollar might have been “a little overcooked on the upside,” with investors now likely to take profit as uncertainty returns. Investors will closely watch the release of March manufacturing data on Thursday, which will offer crucial insights into the cumulative global impact of the conflict, particularly regarding potential stagflation.
