Trump struggles to drum up support for his Hormuz plans

• European economic sentiment collapses.
• RBA hikes rates, lifting AUD.
• Trump struggles to drum up support for his Hormuz plans.

European markets have kicked off the day with a positive theme, as equities move tentatively higher off the back of falling oil prices. The concern around European exposure to rising energy prices does put the continent at risk despite their hesitation to join into the conflict itself. Notably, this morning saw a fresh insight into the impact of this Iran conflict, with a collapse in German economic sentiment taking the ZEW survey into negative territory for the just the second time in over two-years. The decline from 58.3 to -0.5 comes off the back of a sharp rise in energy prices, with the war in Iran expected to negatively impact growth prospects in a region that has been struggling to recover from the pandemic and subsequent inflation crisis. Unfortunately, the reliance on imported energy means that once again the region finds itself at risk just as they stabilise in the wake of the Russia crisis.

The RBA opted to tighten monetary policy once again overnight, taking their cash rate to 4.10% which stands a mere 25bp off the highs seen in 2024/25. Evidently the easing process that got underway last year proved somewhat hasty, with inflation pressures building to take CPI up to 3.8%. While this move has been largely telegraphed, the Australia dollar has turned upwards once again as markets anticipate further tightening to come. Notably, while the RBA looked a relative outlier, the recent rise in energy prices and speculation of $150-200 crude has tilted the narrative for many of the other central banks, with calls for additional easing now shifting to talk of possible hikes.

Markets remain sensitive around any movement within crude prices, as we weigh up the likeliness of a military push to reopen the Straits of Hormuz. Trump’s allies certainly appear to have left him hanging, with the President threatening that not joining his naval mission would be “bad for NATO”. Nonetheless, this is a mission with huge difficulty given the fact that Iran essentially only needs very marginal success to produce enough of a deterrence for any ships hoping to sail the Straits. While there is a hope that we see some form of resolution that allows vessels to sail freely once again, the likelihood is that it will get worse before it gets better. After-all, we are yet to see the Houthi’s move to close the Red Sea; something they did effectively throughout much of 2024 and 2025.