Question for a Champion

The macro point

One of the first lessons we can draw from the conflict in the Middle East is that our dependency on oil remains. It is not only a fuel. It is also the pillar of the industrial economy. For example, oil and gas become raw materials like naphtha, ethane, and propane. These raw materials are transformed into basic chemicals such as ethylene, propylene, and methanol. These products are then used to make plastics, synthetic rubber, resins, foams, industrial chemicals, as well as the products we use daily (packaging, vehicles, electronics, building materials, pharmaceuticals, etc.). When oil markets are disrupted, the entire global production chain suffers the consequences. This is what we have observed since the outbreak of the war in Iran.

What will be the economic consequences of all this turmoil? Hard to say with precision. If the Strait of Hormuz, which is the important strategic node for international trade, is closed for two and a half months, economists estimate that this will cut global growth by about 0.2 percentage points. It would drop from 2.8% to 2.6% - which is still respectable and close to potential. As for inflation, everything will depend on the evolution of the price of a barrel of oil. If it stays around 100 dollars for several consecutive months, this could lead to an increase for developed countries between 0.5 and 1 percentage points. It is significant. Again, these are estimates to be taken with caution. No one is able to know how the conflict will evolve and whether oil will remain so high for long. During the 12-day war of June 2025, it also rebounded strongly before returning to its pre-crisis level at the end of hostilities. Another point of uncertainty is the fiscal response of states. It is perfectly possible for them to implement measures to offset price increases or support the economy if necessary. This was the case in the past.

The good news, however, is that we are not in the same configuration as in 2022, at the time of the outbreak of the war in Ukraine. At the time, we faced both a supply shock (break in gas supply) and demand (strong consumption following Covid) that led to a generalized price increase. In some countries, like Germany, this even led to a price-wage spiral. In such a situation, central banks had no choice but to increase the key rates. They did so, massively at times. Currently, it is solely a supply shock whose extent is still uncertain. In theory, central banks are more in the habit of not paying too much attention to it. They do not have the tools necessary to face it. Generally, they wait until it fades or disappears.

Technical point

Currencies are still in risk-aversion mode, unsurprisingly. The US dollar and the Swiss franc continue to be sought by investors looking to shield themselves against geopolitical turbulence. It's exactly the same market configuration since the end of February. A small difference, however, is the yen has again lost ground against the euro in recent sessions. Many are questioning the evolution of Japanese monetary policy, which makes them cautious. It's rare for the JPY not to play its role as a firewall against rising geopolitical risk.

Another currency that has rather well increased in recent weeks: the Canadian dollar. There is a positive correlation of +0.7 between the CAD and oil. A correlation close to +1 is considered very strong. When crude oil rises, generally, so does the Canadian dollar. This was again proven in the case of the war in Iran. Once this parenthesis is closed, we nonetheless expect a resumption of the upward trend of the EUR/CAD.

Announcements to follow

Central banks are in the spotlight this week. As we hinted above, we expect the monetary status quo to be maintained due to macroeconomic uncertainties related to the situation in the Middle East. The surge in energy and fertilizer prices risks causing short-term inflationary pressures that will prompt delays in planned rate cuts. In the United States, the US Federal Reserve estimates that on average a 10% increase in oil prices results in a 23 basis point increase in the consumer price index and can also negatively impact inflation expectations. Again, this is an estimate that should not be taken at face value. Obviously, the longer energy prices remain high, the more it will pose a headache for central banks while in several countries, notably the United States and the United Kingdom, we observe a slowdown in activity. Be careful, we are not facing a stagflation scenario (low growth, high inflation), for now!

The information presented in this publication is communicated to you for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not in any case serve as a basis or be considered as an incentive to engage in any investment.