Roil over oil? How rising Iran-U.S. tensions could impact markets

On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Rob Cittadini, director, Americas institutional, discussed the potential market impacts of brewing tensions between the U.S. and Iran. They also chatted about the latest headlines surrounding inflation and trade.

Could Mideast oil tanker attacks lead to skyrocketing energy prices?

The Thursday 13 June attacks on two oil tankers in the Strait of Hormuz have the potential to disrupt global markets, Eitelman said, following the U.S. State Department’s accusation that Iran is responsible. So far, the overall market response has been relatively muted, he noted, with the cost of West Texas Intermediate crude increasing to approximately $53 a barrel as of mid-morning Pacific time on Friday 14 June - still well within the range of oil prices seen this year.

"It doesn’t appear yet that markets are viewing these attacks as the potential beginnings of a significant geopolitical or military conflict in the Mideast," Eitelman stated, "but if tensions continue to escalate between the U.S. and Iran, this could become highly significant." Why? He explained that, historically, these types of episodes have led to major spikes in energy prices—which can be very disruptive for the global consumer.

"This is certainly a new source of geopolitical concern, on top of all the trade-war uncertainty markets are already grappling with," Eitelman said, stressing that the situation bears close watching.

Fed interest-rate outlook: Two cuts possible by year’s end

Switching to the U.S. Federal Reserve (the Fed), Eitelman said that a steady stream of disappointing inflation data, coupled with a slowdown in hiring, makes it more likely than not that the central bank will cut rates later this year. "At Russell Investments, we’re now of the view that the Fed will lower borrowing costs at the conclusion of both its July and September meetings," he stated.

When weighing changes to monetary policy, the Fed goes through a cost-benefit exercise, similar to what businesses across the globe undertake when faced with key decisions, Eitelman said. "The benefits of a rate cut are always quite clear," he observed, explaining that a reduction in borrowing costs helps support growth while buffering against downside risks. On the other hand, the costs of a cut late in the economic cycle typically center around the possibility of inflation overheating, Eitelman explained. "This time around, I think the Fed would probably welcome a bit more inflation, given how soft the numbers have been lately," he said. This will likely serve as the catalyst to spur the central bank to slash rates in the second half of the year, Eitelman concluded.

China, U.S. remain far apart on trade as G-20 summit nears

Turning to trade, Eitelman noted that U.S. President Donald Trump’s decision to not move forward with a 5% tariff on all Mexican imports was a positive development for markets. However, the trade impasse between the U.S. and China still remains, he said, with no reported progress made during a recent meeting between Treasury Secretary Steven Mnuchin and People’s Bank of China Governor Yi Gang.

In addition, Eitelman added, no future negotiations are scheduled ahead of the G-20 summit in Japan at the end of the month. "All things considered, the U.S.-China trade war is still very much in play, and the outcome is still very much up in the air," he concluded.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.