Tensions rise in the Red Sea – Should we worry?
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For now, we are not overly concerned that the events in the Red Sea would affect global markets. Risk markets could take a hit from the rising geopolitical uncertainty, but at this point, we do not see this constituting an inflation shock.
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Although freight rates have increased significantly over the past few weeks, energy markets remain calm. In a late business cycle environment, supply side issues are not as inflationary as in an environment where the economy is booming.
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Risks rise in a scenario where the war in Gaza expands. Lebanon’s involvement would raise the risk of Iran also drawing in. Such a scenario could be a gamechanger for the energy markets, for inflation and the major central banks.
Geopolitical tensions are again rising after US and UK launched strikes against the Iranbacked Houthi rebels in the Red Sea. The US and UK assaults on the militant group should not be considered a big surprise since the US has been vowing to protect vessels using the important Suez Canal Route. That said, the events serve as a fresh reminder that the war in Middle East could still expand and escalate. For now, we are not overly concerned about the implications for global markets and trade. However, should the situation drag on for months, it does pose an upside risk to inflation, implying higher interest rates for longer – let alone the dangers it poses to global peace and security.
Who are the Houthis and why are they attacking ships?
As we highlighted in our Research Global: The Middle East unveiled – how a regional storm could ignite global flames, 28 November, the Houthi rebel group, which is part of Iran’s axis of resistance, is a potential threat to stability in the Middle East. Back in 2019, Houthi’s attacks on Saudi Aramco’s Abqaiq oil processing facility led to a reduction in global oil supply of 5%. This time around, after the war between Israel and Hamas started in early October, the Houthis have been attacking dozens of commercial ships voyaging via the Red Sea. Most attacks have taken place near the Bab al-Mandab Strait.
A Houthi spokesman, Yahya Sarea, has said that the group’s attacks against Western commercial ships are to protest the ‘killing, destruction and siege’ in Gaza and the group has said more attacks will follow the US and UK strikes. The US President Joe Biden has said he ‘will not hesitate to direct further measures to protect our people and the free flow of international commerce’. For now, it is fair to assume that Houthi attacks on commercial traffic in the Red Sea will continue at least for as long as the war in Gaza drags on.
What are the implications for trade?
The Suez Canal Route is one of the most important trade routes and the shortest sea route from Asia to Europe. Over the past few weeks, several international shipping companies have announced that they will resort to using an alternative route due to security concerns. Shanghai container rates have more than doubled since early December on the back of container vessels now re-routing around Africa, which increases average Asia-Europe sailing time from around 25 days to around 35 days.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
