A crucial week is ahead for central banks, which could provide investors with indications on their reaction to the closure of the Strait of Hormuz. It should be emphasized that interest rates are a rather ineffective tool for managing a supply-side shock, but history shows they can counteract rising inflation. There is therefore room for an interest rate cut to support growth before underlying inflationary pressures build up.
Overall, we expect central banks to focus on the short-term growth shock and not take into account a potential peak in overall inflation (driven by energy and supply chains). An accommodative tone is therefore expected in the statements, but with the door open to future rate hikes (depending on data). We believe there is room for rate cuts to support the economy in the next two meetings.
The first central bank to meet will be the Reserve Bank of Australia. Before the geopolitical escalation, the market expected a rate hike as early as February, but expectations have now shifted towards a pause. Nevertheless, the committee is likely to maintain a cautious and relatively restrictive communication tone. The Australian economy, in fact, thanks to its role as an exporter of energy and raw materials, appears relatively more protected compared to other developed economies.
The Federal Reserve is probably in the most favorable position. The US economy is partly cushioned by the positive effect of energy exports, allowing the central bank to focus more on domestic fundamentals. In particular, the labor market will continue to be the main driver of monetary policy decisions. At present, there is not yet enough data to justify a rate cut: the most likely scenario remains a pause, with rates close to the neutral level and still solid growth. The domestic political context will also be attentive to gasoline price trends, a sensitive issue for voters, as well as the distribution of tax refunds.
The position of the European Central Bank appears more complex, as it has more limited room for maneuver due to its mandate focused on price stability. In the past, during major crises such as the 2008 global financial crisis or the 2011 European sovereign debt crisis, the ECB even raised rates. However, today the context is different: tools like quantitative easing are now part of the central bank’s arsenal and past experience might lead to a more cautious approach. Attention will therefore be mainly on core inflation and any second-round effects, rather than on headline inflation volatility linked to energy. Moreover, wage pressures are showing signs of easing.
The evolution of the crisis remains closely linked to the situation in the Strait of Hormuz and, in particular, to Iran’s decisions. The longer the Strait remains closed, the greater the risk of a negative impact on the global economy.
PORTFOLIO POSITIONING
In this context, we maintain a constructive positioning on commodities, which directly benefit from energy tensions. On European government bonds, we prefer a shorter duration, believing that rate hike expectations priced in are excessive, also in light of the reduction of positions by more leveraged funds.
On the currency front, we maintain a long exposure to the US dollar, a choice that diverges from our long-term view but reflects its current role as a safe-haven currency in times of stress. We also maintain a long position on the Australian dollar, supported by the export nature of the country’s economy.
Finally, on equities we prefer a neutral positioning. A significant underweight would indeed be risky at a time when the “buy the dip” market dynamic remains well entrenched among investors.
