Money market traders have increased their expectations for Reserve Bank of Australia (RBA) cash rate hikes amid surging energy prices. Traders are now pricing in two rate increases by August and a strong possibility of three by year’s end, implying a rate of 4.5 per cent. This shift comes as investors grapple with the potential for an oil supply crunch stemming from ongoing geopolitical tensions.
Concerns centre on potential disruptions in the Strait of Hormuz and the broader conflict involving Iran, the US, and other nations. Helima Croft, head of global commodity strategy at RBC Capital, suggests a swift resolution is unlikely, potentially leading to the most significant oil supply shock since the 1970s. The uncertainty poses challenges for Australian investors, particularly after a period where the local equity market benefited from a strong earnings season and its weighting toward miners.
Analysts at Morgan Stanley cautioned that a prolonged conflict could erode consumer confidence, raise the risk of stagflation, and negatively impact stocks by pressuring earnings. This warning coincided with a sharp decline in the ASX, marking one of its most significant drops outside of the pandemic and the global financial crisis. While the market showed some resilience later in the session, concerns remain.
Despite initial market jitters, some investors see opportunity in the turmoil. Romano Sala Tenna, a portfolio manager at Katana Asset Management, used the market slump to buy stocks he considered undervalued, particularly those already in the portfolio or directly affected by the conflict. Katana Asset Management is an Australian fund manager that invests in various asset classes, including equities and fixed income. Regional experts, however, express deeper concerns, with some suggesting that the scale of developments in the Middle East has been underestimated.
