Resilient economies despite the Middle East stalemate

Investors can return from their summer holidays and take comfort in noting that the collapse of the ceasefire in the Middle East has not derailed global growth. The latest PMIs reflect resilient growth particularly in the US and Asia ex-China, while Europe remains the relative underperformer. Oil prices have risen during periods of escalating warfare, peaked above USD 100 on the back of the Houthi announcement of opening a second front in the Bab el-Mandeb strait, but fell again this week after news emerged that a deal between Iran and Oman to reopen the Strait of Hormuz had in principle been agreed.

We think all promising news from the Middle East should be read with great caution at this point. It is likely that any deal that has been agreed "in principle" remains subject to backroom bargaining. For now, Iran and Oman have agreed that they could reopen the strait for a 2-4-month period, and Iran would maintain significant control of the strait. The US has not given their green light to the deal, and even in the best case, traffic is unlikely to restart immediately.

Despite all the uncertainty regarding key maritime chokepoints, Brent oil price has reversed back to USD 80 per barrel, with EUR/USD also rebounding back above 1.15. Traffic via the Strait of Hormuz has fallen close to zero since mid-July. In the Bab el-Mandeb strait, traffic volumes have fallen but not collapsed despite the Houthi rebels' attacks against Saudi oil infrastructure in recent days. In the past months, China's oil imports have fallen sharply, highlighting how demand destruction plays a key role in rebalancing the crude market.

While the global crude market is relatively calm, energy markets have more generally been under pressure during the summer. As refineries globally must operate in an environment where they struggle to access the specific qualities of crude their processes are optimised for, refining margins remain elevated. For the gas market, low inventory levels especially in central Europe imply prices will remain elevated over the coming winter as well.

Other commodity markets have also followed the developments in the Middle East. Aluminium prices have reacted to both negative and positive developments, as the Persian Gulf is a key producer region, while copper prices have trended upwards, primarily driven by the AI investment boom. Wheat prices hit their multi-yea r high in July, as clashes between Russia and Ukraine in the Black Sea add to the long list of geopolitical concerns. 

Despite all the volatility across commodity markets, inflationary pressures eased during the summer, also for core inflation. The near-term inflation outlook continues to be driven by geopolitics, but AI-driven cost pressures are also increasingly becoming a concern. We have not made any changes to our major central bank calls during the summer. We still expect the ECB to hike in September, and the Fed to hike twice - in December and March. 

Next week, we keep an eye on US price developments as both July CPI and PPI data is due. On Friday, retail sales will provide the first hard data evidence of the strength of the American consumer, and the Michigan survey will provide an even more forward-looking signal.

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