3 stress signals beyond high oil prices show investors are underpricing risks from the Iran war
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- Strategist Naomi Fink warns investors are misjudging Iran war risks.
- Fink said that there are stress signals beyond the price of oil flashing.
- She highlighted shipping insurance and freight rate issues impacting global supply chains.
A market strategist thinks investors are looking at Iran war volatility all wrong.
The chief global strategist at Amova Asset Management, which manages $260 billion in assets, said in a client note earlier this month that investors seem to be pricing in a simple oil shock. Yet, under the surface of oil prices, other warning signs of a more serious economic shock are starting to emerge, Fink said.
"The most acute stress has emerged not in crude prices, but in logistics and transport markets," Fink wrote.
She highlighted three stress signals in particular that markets are overlooking that could put a serious kink in global supply chains.
The first is the withdrawal on insurance on ships moving through the Strait of Hormuz. Even if the US Navy could open the Strait, insurance companies may still not be willing to provide coverage to ships passing through it.
Second, the cost of shipping has soared, which will weigh on demand.
"LNG freight rates surged from roughly USD 23k/day pre-conflict to above USD 220k/day; this is roughly a 1000% increase and a real cost borne by transporters and ultimately consumers," Fink wrote.
Amova Asset Management
And third, the number of ships going through the Strait per day has fallen from between 130 and 240 to around five, Fink said, essentially cutting off the supply of any product—not just oil—that uses the key waterway to reach global markets.
Add all of that up, Fink said, and even if oil prices fall, it may not matter for the global economic outlook.
"Additional oil supply may exist physically, but if it cannot be shipped or insured, supply cannot clear globally," she wrote. "The shock increasingly resembles a logistics-driven energy shock rather than a simple production shortfall."
It's difficult to predict how much these factors will weigh on economic growth, Fink said. They may continue to leak into inflation data, hamper spending, and tighten financial conditions over the course of several quarters, she said, which will then eventually show up in GDP data.
In this sense, the war is at a "critical juncture," she said — the longer that shipping delays drag out, the more they will be a drag on growth.
Wall Street institutions, including Bank of America and Citadel Securities, are starting to warn that growth concerns, not inflation, are increasingly a risk to watch as the Iran war continues.
"Markets need to see safe passage of international ships through the Strait of Hormuz soon, or financial conditions will need to shift focus from inflation to growth risks," Citadel Securities strategist Frank Flight said in a report on Monday.