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Complacent Markets Brace for Prolonged Middle East War
7 Mar
Summary
- Oil prices jumped 17% to over $85 per barrel after Strait of Hormuz closure.
- Global markets may be complacent about a potentially protracted Middle East conflict.
- Central banks face a bind of stagflation risks with rising oil prices.
Global markets might be overly complacent regarding a potentially protracted conflict in the Middle East, economists suggest. The closure of the Strait of Hormuz, a crucial artery for a fifth of global oil and gas, has seen oil prices jump 17% to over $85 per barrel.
This has sent shockwaves through financial markets, with Asian markets heavily impacted and the Australian sharemarket experiencing a notable loss.
Despite these events, Wall Street has seen a relatively mild response, leading some economists to worry about market complacency, particularly given the uncertainty surrounding the conflict's duration.
The economic challenge is amplified by the specter of stagflation, where higher oil prices simultaneously fuel inflation and hinder economic growth.
This scenario places central banks in a difficult position, balancing inflation control against economic support.
Reserve Bank of Australia Governor Michele Bullock has indicated alertness to the risk that climbing petrol prices could entrench inflation expectations, making them harder to control.
While many investors anticipate a short conflict, a prolonged situation could necessitate a fundamental reevaluation of market positions and economic outlooks.
