Markets have largely been shrugging off the escalating crisis in the Red Sea. Not so much anymore.
Last week, the US and the UK carried out strikes on Houthi rebel sites in Yemen following a series of attacks on vessels by the Iran-backed militants in the past 3 months. The US and the UK, with the support of other countries including Australia, want to protect the free flow of international commerce: the Red Sea is a key shipping route between Asia and Europe.
Oil prices, which have held at low levels over the past month despite the tensions, surged close to 4% last week. The price of gold also rose as the geopolitical escalation heightened investors’ appetite for safe havens.
The oil price spike is problematic for the US Federal Reserve’s (Fed) battle against inflation, and the same applies to other central banks. Energy prices were partly to blame for recent upticks in inflation and additional pressures won’t help bring inflation down. It’s a blow to hopes for a first rate cut from the Fed in March, and markets are now recalibrating their forecasts.
It’s not just the impact on markets that’s being felt. The implications for global supply chains are also beginning to take greater effect as shipping companies have been forced to take longer routes to avoid the region.
Tesla said it would halt production at its Berlin factory for two weeks because the crisis is disrupting transport ships, leaving the electric vehicle maker with a shortage of components.
The situation in the Red Sea is testing the confidence of global markets.
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