Global Markets Jolted on War and Oil Risks
As we go to print, extreme volatility is gripping markets. News over the weekend has been anything but reassuring - the Hormuz Strait remains effectively closed, regional energy producers are shuttering facilities and policymakers are scrambling to secure their supplies. Crude blends are up more than 20%, a range of regional bourses are limit down (Nikkei -7%), the defensive ASX is down only 3.5% while US equity futures are down more than 2%. The Australian dollar gave up the 0.70-handle at the start of trading this week (-0.6%), and is surprisingly holding in well against these wider market moves. The calendars are much less eventful in the week ahead and will in any case be a very distant consideration to the dramatic upheaval in energy markets.
Global Markets Jolted on War and Oil Risks
As we go to print, extreme volatility is gripping markets. News over the weekend has been anything but reassuring - the Hormuz Strait remains effectively closed, regional energy producers are shuttering facilities and policymakers are scrambling to secure their supplies. Crude blends are up more than 20%, a range of regional bourses are limit down (Nikkei -7%), the defensive ASX is down only 3.5% while US equity futures are down more than 2%. The Australian dollar gave up the 0.70-handle at the start of trading this week (-0.6%), and is surprisingly holding in well against these wider market moves. The calendars are much less eventful in the week ahead and will in any case be a very distant consideration to the dramatic upheaval in energy markets.
The Australian dollar has been navigating a tricky balancing act between upside impetus from higher energy/commodity prices and downside impetus from sharply reduced risk appetite. The Australian dollar chopped its way lower last week from just shy of 0.71 to the mid-0.69s. This is surprisingly relatively "resilient" price action given the rise in volatility and de-risking across markets. Evidently, Australia's net energy exporter status confers a degree of support for the currency that many of our G10 peers lack (Europe & Japan).
AUD crosses are also hanging in there. AUD/JPY refuses to give up the 110+ handle, AUD/EUR is within striking distance of its multi-month highs (spot currently at 0.6065) and AUD/NZD is holding above 1.19, also within striking distance of its multi-year highs.
In the wider G10 sphere, the worst performing currencies since hostilities erupted have been the European currencies with EUR/USD off -2.5%. EM currencies have also been hit pretty hard (KRW down -3.7%, MXN down -4.3% and ZAR down -5.4%).
It remains to be seen whether AUD could withstand a wider breakdown in markets. It seems that the first order price/commodity impacts have washed through the currency and helped support it on cross, but there has to be some caution about second order growth impacts and another potential breakdown in risk assets which could be expected to fall very differently on AUD.
We are seeing some very interesting moves in rates markets as well right now too. Australian 3-year bond yields are up +16bp on Monday and another +12bp in RBA rate hikes have been added through to Nov 2026 taking the total amount of hikes to +65bp.
Extreme disruption upends energy markets
Iraqi production has reportedly collapsed by 70%, from roughly 4.3mn barrels per day (bpd) to just 1.3mn/bpd over the weekend. Iraq's oil minister said that “this is the most serious operational threat Iraq has faced in more than 20 years”. Kuwait’s oil cuts also started at about 100k/bpd as of early Saturday and was expected to almost triple on Sunday according to the Wall Street Journal.
Policymakers are not standing still. President Trump announced a "suite of measures" last week including; a 30-day waiver allowing Russian oil sales to India, alongside naval escorts and insurance support for vessels moving through the Strait of Hormuz. Today's +20% moves in oil obviously dwarfs whatever reassurance these measures potentially offered. A number of countries are also looking into releasing fuel from their Strategic Reserves, instituting price caps and rationing refined supplies.
Japan will be one to watch given calls from refiners for the Government to release crude from the nation’s SPR. Japan holds about 440mb in stockpile, with 260mb in Government stockpiles and 160mb in private sector stockpiles with another 18mb in joint storage.
Australia's Energy Minister, Chris Bowen, commented last week that Australia has roughly 1 months' worth of petrol, diesel and jet fuel on hand, however inflationary concerns continue to drive bond yields higher.
As we enter week 2 of the US-Iran conflict, Mojtaba Khamenei (son of the late Ayatollah Khamenei), has been elected as Iran's new Supreme Leader. The key question here is how long we can expect this conflict to continue. While President Trump initially provided a 4-week timeline for this war, betting markets are pricing a 70% chance that the conflict ceases by June 30.
Other notable "mentions" across global markets include Korea's KOSPI, which is off -18% since Friday and Japan's Nikkei which is down -12.2%. Until very recently, tech heavy regional markets have been investor favourites. But AI rumblings, and now more recently the global energy crisis have put these markets under heavy pressure.
Gold and silver caught a brief bid early last week with gold approaching $5400/oz and silver approaching $100/oz. However, not even the precious metals have been immune. A sharp backup in US yields last week (climbing close to 30bp over the week), alongside wider de-risking across all markets has hampered precious metals
Solid Australian data last week
Local Q4 GDP was strong coming in at 0.8% q/q, emphatically underscoring the rebound, though the RBA might find some reassurance in a lift in productivity and lower unit labour costs, along with slightly weaker consumer momentum in Q4.
US Feb nonfarm payrolls surprised to the downside, with a -92k decrease in jobs (vs +55k expectations) and the unemployment rate ticked 0.1% higher to 4.4%. The previous 2 months were revised lower by -69k. However markets seemed to brush this off fairly quickly as US-Iran monopolised market moves.
China also held their annual National People's Congress (NPC) last week. The key takeaways were; China has set a GDP growth target of 4.5-5% for 2026, the lowest in almost 30 years, given the headwinds of weak domestic consumption and the property downturn. However, fiscal policy will remain stimulatory with the budget deficit set for 4% of GDP. Many of the previous 5-year plan initiatives have been maintained including; a drive towards tech leadership, and self-sufficiency in a range of industries.
The week ahead...
Local data remains light this week aside from the Westpac and NAB sentiment surveys. US Feb CPI (Wed) US Jan PCE, personal income/spending and University of Michigan survey will be watched
Most of these data points predate the outbreak of the US-Iran war. And in any case, decisive war-related headlines continue to break daily so markets will be much more focused on that than the data.
Tuesday
- Australia Mar Westpac Consumer Conf., Feb NAB Business Conf.
- US Feb NFIB Small Business Optimism
Wednesday
- Japan Feb PPI
- US Feb CPI, Federal Budget Bal.
- Fedspeak; Bowman.
Thursday
- US Jan Housing Starts, Trade Bal.
- Fedspeak; Bowman.
Friday
- UK Jan Monthly GDP
- Canada Feb Unemployment
- US Jan Personal Income/Spending, Monthly PCE, JOLTS Jobs Data, Mar Uni. of Michigan (Prelim.)
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