Capital Idea: Market wrap, 17 March

• Global markets continue to swing on energy market volatility

• The theatre of war remains the Strait of Hormuz as oil drops

• The RBA kicks of a massive week of central bank decisions

Global markets remain a derivative of energy volatility, with the swings seen across commodities, equities, bonds and FX all driven by a drop in the oil price overnight. While there’s the hope the movement of energy exports through the Strait of Hormuz may begin to normalise, there’s little substantial evidence to suggest much has fundamentally changed since the end of last week. The Trump administration has implored adversaries and allies alike to support forcing open the Strait. Meanwhile, Iran says it remains under its control. The theatre of war is the Strait of Hormuz, with the conflict now hinging on who controls it. Iran’s strategy is to disrupt trade flows for as long as it can as future deterrence to any similar strikes on the regime as February 28th. The US is trying to wrestle back control so it has the leverage to further its strategy — whatever that ends up being — or force negotiation.

Until that time where the Strait returns to normal operations, risks to energy markets and the global economy will persist. The policy response to the crisis will begin to crystallise in the coming days as a massive week of central bank meetings commence. A majority of G10 central banks set policy in the next four days, with market pricing shifting recently to reflect either imminent hikes or at least less easing than what was being discounted prior to the crisis. Heading into the start of the FOMC decision, the markets have priced out a full cut from the Fed this year. Policy uncertainty and the risk of a policy mistake has risen too, with there likely to be division by central bankers about whether policy should react to the supply shock or look through it.

(Source: Bloombrg, Capital.com)

The Reserve Bank of Australia is the first cab off the rank today in terms of central bank meetings and it’s a “live” meeting. There’s little impediment to a hike today. It’s just a matter of timing based on market pricing. A hike today is being given a 60% chance by rate markets. A hike is fully baked in by May, with more priced in from there. With inflation running above target and at risk of accelerating given the recent energy shock, GDP running above the so called “speed limit” of the economy, and the unemployment rate at levels below notional full employment, the RBA’s decision rests on whether it pulls the trigger today or is comfortable waiting things out.