Its all rotating back again.

There is a fairly consensual view among market commentators on the potential impact of this geopolitical shock on markets, but it’s hard to argue with the expectation that this war, as was the case at the start of the Ukraine war, risks stagflation by raising oil prices and lowering growth. Don’t forget that, if shipping lanes are disrupted, it not only affects the supply of oil but also of other goods. Tehran has effectively closed the Strait of Hormuz, the narrow passage through which roughly 20% of the world’s oil and gas supply passes. It is a vital artery for approximately 11% of global seaborne trade by volume, including iron ore, consumer goods, Aluminium, and fertilisers.

Yesterday, the oil price climbed above $80 a barrel. A further example of how supplies can be affected by events: Beijing told major refiners to suspend exports of diesel and gasoline, reflecting efforts to prioritise domestic needs amid shortages. Wall Street, which had held up pretty well until now, yesterday reacted to the ongoing conflict. Those portfolios that benefited in the past year from the broadening of markets have taken the brunt of the sell-off, as the Dow Jones fell over 1% yesterday, and European indexes have lost over 5% in the past week. The Nasdaq index has barely reacted to the recent geopolitical uncertainty. Tech-focused portfolios had a tough start to the year but are catching up now.

Looking at current economic reports is all a bit pointless at present. They may be better, as was the case with this week’s US manufacturing ISM; indeed, the monthly PMIs also painted a positive picture for the global economy in the coming months, but it’s yesterday’s news.  One thing worth watching is how inflation expectations are changing. The 5-year 5-year series is a measure of expected inflation (on average) over the five-year period that begins five years from today, and is probably the best way. So far, there has been little reaction, https://fred.stlouisfed.org/series/T5YIFR. The longer this conflict lasts, the longer the potential impact on economies. The consensus view is that Trump will want the conflict to end sooner, as he does not want to see growth slow, prices higher, and stocks lower, particularly leading up to the mid-term elections. But conflict can last longer than anticipated. Another thing we have learned this week the US dollar still functions as a safe haven in markets in times of uncertainty. Those who complacently sat there, short the dollar, long EM, have had a nasty shock. The next Merrill Lynch fund manager survey could make interesting reading. The Vix fear index has spiked as would be expected, but not yet anyway, maybe quite as much as could be expected, trading just above its long term average.