As a special edition release, we have drafted an important Insights article to explain some commentary that has arisen from clients and industry contacts over the last week or so.
The main catalyst for majority of the questions has stemmed from the current conflict in the Middle East and the potential effects a prolonged conflict could have on markets and businesses alike.
I would normally suggest that my crystal ball is currently cloudy, or my piece of string is still being measured, as the truth be told, I do not know what will happen if this conflict continues for another four or five weeks as suggested by President Trump. Capital Economics do have a good research piece that covers three scenarios.
The biggest concern for a large percentage of the population will be the rise in oil prices and therefore the pump prices at the fuel bowser at service stations. With some justification in an already elevated cost-of-living crisis. There is a two-prong effect – one the price of oil is high due to the conflict and fuel prices will stay higher for longer. Secondly, if oil prices stay high and the supply chain is curtailed, then Australia may see very high prices for fuel at the bowser for an extended period.
This will hurt consumers and another whammy will be that freight costs will have to rise. It will be impossible for logistics/transport companies to absorb the margins on higher fuel costs. This results in higher shelf prices for a massive amount of goods due to the transportation networks of Australia.
This leads to a discussion around inflation going higher and in turn the RBA increasing official Interest Rates. This causes households to withdraw their discretionary spending and possibly the reallocation of core spending. The economy will potentially slow.
This is a main argument of economists as to why an oil price spike causes more damage than most supply chain input crises – because it impacts large swaths of the economy.
One would expect that the RBA will stay on the sidelines whilst the conflict is still ongoing - I am sure the RBA understands that the oil price rise is related to the conflict and not some other long-term structural adjustment. In the lead up to a Federal Government Budget, there might be some phone calls back-and-forth (subject to independence issues and my cynical bias) suggesting the same.
Unfortunately, the build up of inflation since late last year cannot go unnoticed and the oil spike might just be the “mouse that sinks the boat” and gives the RBA the freedom to move higher. Unemployment in Australia is certainly lower than predicted by the RBA. So spending is continuing alongside household savings.
Mortgage holders should certainly be adjusting budgets and Boomers will clap a bit louder and spend some more. The spending might be needed in the near future!
Currently, equity markets have fallen but have come off lows of the last few days. That does not mean that the equity markets will not head back down if the conflict continues for longer than anticipated. Bonds markets are pricing interest rate rises into the equation, as early as the next RBA meeting (March 2026) in Australia. The bond market is bigger than the equity market – so watch this space.
The US jobs report last week was weak, so a drawn-out Middle East conflict with a higher for longer oil price, I would suggest that US will slow considerable and that will vibrate around the globe. A slow job market and a high inflation rate is the proverbial “rock and a hard place” for the Federal Reserve.
Europe will be hit hard by a sustained oil price rally, which if both US and Europe slow will then reduce China’s growth. Leaving good old Australia to follow suit.
At this stage, it seems that the markets are waiting to see if anyone backs down or starts to negotiate a settlement. The longer something like this takes, the more nervous the markets will become. Not sure if a war is a TACO moment for President Trump.
What is the impact on businesses? Too early to tell, but conversations are now starting, especially around who is responsible for freight costs, and what can be passed on. Will we see a return to the fuel surcharge?
There are still two other predominant issues currently in the minds of market players/business owners – that is private equity/private credit and its predicament with SAAS providers and the impact of AI. One commentator even suggested that the fall in most markets last week was related to these topics and not the Middle East conflict. Maybe that was last week’s news, I am sure oil became top of mind once Monday came around. In saying that, neither of the two issues have gone away.
The private equity/private credit dilemma involves large amounts of capital and debt tied up in businesses that may now not be worth as much as they were two years ago. Private Equity relies on exiting assets within five years. This is not happening at the speed or the price they would like. Redemptions in certain Funds have been frozen – especially the private credit funds. How far these issues spread into the mainstream banking circles is yet to be determined. The numbers here are every big. A few of the big US private equity players have share prices off 40%+, with an alternative asset manager – Blue Owl – off 60%. That is known as a crash.
AI has also not disappeared and continues to evolve at speed. There is plenty of commentary in the media around white-collar jobs disappearing and there has been hard evidence via Wisetech and Block that potentially the white-collar jobs will disappear. The saving grace currently is that AI will create different jobs that will still mean employment is available for many. We just do not know if the jobs will appear in volume and when they will appear. It is that unknown which is causing the risk and nervousness in the marketplace. The Middle East can settle down tomorrow, but this AI issue will continue to dominant discussion.
Add to the above the upcoming Federal Government Budget - which if you follow media sources will be the biggest taxation reform budget in a very long time. I doubt that, but more on this topic next week.
I promise to be more upbeat next week when I discuss the wealth taxes that are coming.
For any further information on the commentary above, please feel free to contact our team - who would be happy to assist where possible.
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