Market Impact of War Finally Registering: 3-Minutes MLIV

Summary

• Energy prices are experiencing a step-change, with Brent crude at $114 and European gas prices jumping 24% in a single morning.
• The market trajectory is expected to involve periods of denial and optimism, followed by step shifts higher in expectations until there is clarity on the sustainable reopening of key shipping straits, which is not anticipated soon.
• The impact is broadening beyond crude to derivative products and industries, including natural gas, helium, fertilizer, jet fuel, and shipping, indicating targeted economic damage.
• The Brent-WTI spread is blowing out significantly, with Brent surging while WTI remains flat, creating specific problems for certain economies and sectors.
• The recent Fed meeting was marginally hawkish, signaled by two previous dissenters no longer dissenting, but its message is completely overshadowed by the Middle East conflict.
• Central banks, including the ECB, BOE, and SNB, have limited capacity to respond meaningfully to the conflict in the near term, as their reaction will depend entirely on its duration.
• A persistent conflict creates a stagflationary impulse, combining inflationary energy shocks with demand destruction; which effect dominates depends on the magnitude and longevity of the price surge.
• Despite global equities suffering their worst month in four and a half years, a speaker argues there is significant further downside as markets have yet to fully price in the damage from energy and related commodity markets.