Weekly Winzer: Cash is king

The capital markets continue to be significantly influenced by events in the Middle East . What is special about the current market development is that share and bond prices are falling at the same time – as is the price of gold. Such an unfavorable constellation typically occurs when price rises lead to a loss of purchasing power – i.e. inflation .

In economics, this is referred to as a “stagflationary impulse”. Uncertainty about rising energy prices is currently dominating the markets. The only positive aspect is that the environment in the first quarter, i.e. before the escalation in Iran, was favorable for economic growth. Global growth was probably above potential at the start of the year. Against the backdrop of the war, however, there are signs of a decline in the second quarter.

Market drivers

The key question at the moment is how serious the impact of the war in the Middle East will be. Even timely economic indicators such as the preliminary purchasing managers’ indices for March, which will be published this week, are currently only playing a minor role.

The sensitivity of the markets can be illustrated by the announcement of the International Energy Agency on March 20: “The war in the Middle East is leading to a severe energy crisis, including the largest supply disruption in the history of the global oil market. If a swift solution is not found, the impact on energy markets and economies is likely to become increasingly severe.”

Eye of a needle

The third week of the war was characterized by a further escalation in the form of attacks on the energy infrastructure in the region. This increases the potential threat. Initially, the focus was on the possible duration of the war, which was originally estimated at just a few weeks. Attention then shifted to the question of who has de facto control over the Strait of Hormuz. Normally, around 20% of global crude oil and liquefied natural gas shipments pass through this strait. In the course of the war, it became clear that Iran could retain control – despite its military inferiority to the USA and Israel and even if the war ended.

Escalation

Last week saw a further escalation: civilian energy infrastructure in Iran and Qatar was deliberately damaged. The most recent and at the same time central development in the tit-for-tat escalation so far is as follows: last Saturday, the US President warned that Iran’s electricity infrastructure would be bombed if Iran did not fully open the Strait of Hormuz within 48 hours.

For national economies and markets, it is therefore no longer just a question of who has control over the strait, but also whether and to what extent the region’s energy infrastructure is damaged.

Mechanism

Uncertainty about the extent of possible restrictions in global energy supply has triggered further energy price increases . As wages and company sales are not expected to rise to the same extent, this is weakening purchasing power and economic growth. In addition, there is increasing uncertainty, which could further slow down economic activity by reducing investment.

Uncertainty is also increasing with regard to inflation itself. In order to mitigate pass-through effects (e.g. higher food prices) and second-round effects (higher wages), important central banks such as the European Central Bank are focusing more strongly on combating inflation risks. The market is currently pricing in three key interest rate hikes of 0.25 percentage points each to 2.75% by the end of 2026.

Reduction of gold

The immediate question for the markets is: “What happens if the US president’s threats do not have the intended effect?” Iran has threatened to attack power plants and water infrastructure in the region. And even if Iran relents, the insurance costs for passage through the strait are likely to remain high for the time being.

Expectations of lower profits, higher inflation and possible supply disruptions, coupled with increased uncertainty, are weighing equally on share and bond prices. For this reason, we already reduced the equity allocation below the long-term focus in mid-March and increased the money market allocation in return.

The price of gold is also showing a clear downward trend – partly caused by rising interest rates. We are therefore neutralizing our previous overweight in gold and increasing the money market share again. The stronger the stagflationary impulse, the more the motto “cash is king” applies.

 

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