US pledges to reopen Strait of Hormuz

US President Donald Trump said the US would take measures to open the Strait of Hormuz to international shipping, offering insurance at a “very reasonable price” and that the US Navy would escort vessels if necessary. The statement from the US follows threats from IRGC officials to any vessel attempting to move through the critical chokepoint for global energy. Iraq is the latest Middle East oil producer to be impacted by the effective closure of the strait with the country’s national oil company announcing it had shut in production at the Rumalia and West Qurna oil fields, some of the world’s largest.

Among other ongoing economic impacts of the conflict, Qatalum, Qatar’s aluminium producer, has begun to shut down output, noting in a statement that a full resumption of production could take 6-12 months. Oman has closed the Duqm port as a “precautionary measure.”

Inflation in Türkiye accelerated in February, rising by 31.5% y/y and halting the disinflationary path for the last four months. Food prices rose nearly 7% m/m, a second month in a row of sharp gains, while communications and education prices were also notable gainers last month. Producer prices also picked up in February, rising by 27.6%. Türkiye will likely see a quick pass through of energy price inflation caused by the current war which may give the central bank further pause in cutting rates at upcoming meetings.

Inflation in the Eurozone rose to 1.9% y/y in February, up from 1.7% a month earlier. Core inflation also picked up, rising to 2.4%. Seasonal events like Italy hosting the Winter Olympics appear to be part of the reason for the pick up in prices with hospitality costs rising. The sharp rise in energy prices, particularly natural gas, will pass through into higher headline inflation in the Eurozone and will reinforce the ECB’s stance to keep rates on hold.

China’s official manufacturing PMI dropped to 49 in February, down from 49.3 a month earlier. Non-manufacturing managed to improve to a still contractionary 49.5 as the impact of the Lunar New Year holiday meant weaker business activity. Private sector PMIs were stronger with the services PMI rising to 56.7 and the manufacturing PMI at 52.1.

Today’s Economic Data and Events

19:00 US ISM services index Feb: forecast 53.5

23:00 US Fed beige book

Fixed Income

Yields on the US Treasury curve extended moves higher overnight with the 2yr UST yield up another 3bps at 3.5081% and the 10yr adding about 2bps to 4.0594%. The moves are part of a broader sell-off in government bond markets as the inflationary pass through of the US-Israel air war against Iran is the most likely outcome. Gilt yields added almost 10bps while OAT yields were also sharply higher.

In emerging markets, 10yr Turkish lira government bonds showed yields up 20bps at 28.68% while South African 10yr yields rose 18bps to 8.433%.

Corporate bond markets also showed losses, across all sectors and geographies. Regional bonds showed a worsening picture with a GCC-wide EM bond index lower by 1.3%.

FX

The US dollar remained supported as a haven currency overnight. EURUSD extended losses by another 0.6% at 1.1613 while USDJPY moved higher by 0.2% at 157.74. GBPUSD fell by 0.4% to 1.3358. In commodity currencies the Canadian dollar showed some stabilization, holding near unchanged at 1.368 while both AUD and NZD dropped.

In emerging markets, USDINR moved another 0.6% higher to 91.4762 while Turkish lira was unchanged. Earlier this week the central bank in Turkey suspended its one-week repo auction, instead offering banks funding at a secondary rate of 40%, higher than official policy rates at 37%.

Equities

The ADX and DFM are due to resume operations today with limit down conditions in place.

International benchmarks continue to reel from the conflict with the Dow Jones lower by 0.8%, the S&P 500 falling 0.9% and the NASDAQ lower by slightly more than 1%. European markets were sharply lower with a 3.6% fall in the EuroStoxx index while the FTSE was lower by 2.8%.

Asian markets have opened sharply on the backfoot this morning with a fall of 3.9% in the Nikkei and the Hang Seng lower by 2%.

Commodities

Oil prices tested higher levels again overnight in response to the effective commercial closure of the Strait of Hormuz and production shut ins across the Middle East. Brent futures were higher by 4.7% at USD 81.40/b while WTI added about the same amount to settle at USD 74.56/b.

Brent in particular is pricing in a steep backwardation at the front of the curve with the 1-2 month spread at more than USD 3/b. Regional storage tanks will be filling rapidly with the strait closed while freight and insurance costs to transit from the Middle East to destinations in Asia remain highly elevated.

Gold prices pulled back overnight with a 4% drop to 5,089/troy oz, dragging the rest of the metals complex with it. Industrial metals were mixed though aluminium prices are due to receive a bid thanks to supply disruptions from the Middle East.