Trump’s mood swings are holding the world’s financial system hostage

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The Iran war is doing more immediate damage to the economies of America, Europe and Japan via the bond markets than it is through the direct effects of the energy shock.

Borrowing costs have reached critical levels across the G7. They are resetting the price of credit for vast swaths of the global financial system. The effects are cascading through the mortgage industry and pushing a universe of over-indebted companies towards a refinancing crisis.

Stock markets cannot defy this force for long. Ultimately, equity prices are a highly geared function of future cash flows discounted by cost of interest. Sooner or later – and in my view sooner – the bond sell-off will short-circuit Wall Street’s tech boom and set off a major equity correction.

Trouble is almost unavoidable at this point because Donald Trump has no easy way of extricating himself from his calamitous misadventure in the Gulf.

We are still in the “phoney war” phase of the energy crisis but do not be fooled by that. “Oil markets are operating under a veneer of stability, but the underlying system remains acutely stressed,” said Michael Haigh and Ben Hoff from Societe Generale.

Supply shock: The Iran war will change the oil market forever

Stephen BartholomeuszSenior business columnist

Senior business columnist

The International Energy Agency says 14.4 million barrels a day of prewar global supply has been cut off. Quick fixes have so far disguised the loss of one billion barrels, but the world is edging closer to the crunch point where depleted inventories hit the operational limits of the system.

Societe Generale says that even if the war ends today, the lagged effects will push Brent oil prices to $US125. “The sequence of tanker transit, discharge, refining and distribution implies a delay of at least 52 days, meaning end-users do not see relief until late July at best,” it said.

If the war goes on for another two weeks from now, the price would head to $US150 and the embedded loss of inventory would prolong the trouble into 2027. It will not take much for prices to go wildly higher.

The bond markets are........

© Brisbane Times