As faces his ‘mission accomplished’ moment, Aussie borrowers risk getting caught in the crossfire
It’s America’s world and we’re just living in it. That’s how Australian mortgage holders must be feeling right now.
As the Gulf descends into chaos amid a war set off by joint US-Israel attacks on Iran, the threat of a global energy crisis is becoming realer by the day.
Although US president Donald Trump teased a quick in-out operation in Iran, that promise is starting to grow shades of George W. Bush’s infamous ‘mission accomplished’ speech on 1 May, 2003.
The US was six weeks into its invasion of Iraq when Bush declared victory back then – eight years later, the conflict was still ongoing. Hopefully history won’t repeat itself to such a disastrous extent, but this current conflict looks messier by the day as Trump doubles down and more countries get pulled into the crossfire.
Australians are set to suffer the fallout of these escalating tensions.
Brent Crude is currently trading at the US$100 a barrel mark, after peaking as high as $117 earlier this week. It enjoyed a quick reprieve at the low US$80 mark before shooting up again.
Oil price volatility is being impacted by a spillover of tensions into the Strait of Hormuz, where a fifth of all global oil supply passes. Attacks on merchant ships have all but shut down the strait, meaning global oil supply is not running on a full tank.
Commonwealth Bank’s Vivek Dhar head of commodities and sustainability research Vivek Dhar estimated the disruption to global oil markets arising from closure of the Strait of Hormuz amounts to 14‑16% of global supply.
Measures to free up strategic oil reserves have helped to contain further price shocks, while here in Australia, fuel standards have been temporarily downgraded in a move that will hopefully put an extra 100 million litres per month into the system.
“The current disruption to global oil markets is unprecedented from two dimensions – the extent of supply sidelined and the lack of spare capacity. The share of global oil supply disrupted is almost double the previous largest event,” said Dhar.
Dhar does not believe the energy markets are fully pricing in the disruption posed by the ongoing conflict.
“Our expectation that this crisis could last for months instead of weeks likely means that… Brent oil could surge towards $US120‑150/bbl to force demand destruction (i.e. where high prices reduce demand) amongst developing economies once physical shortfalls are realised,” he said.
Meanwhile, Australia’s three-year bond yield is now effectively moving in lockstep with oil prices (see below). This quirky correlation actually makes sense: it suggests markets expect surging fuel costs to drive inflation higher, which in turn will force the Reserve Bank of Australia (RBA) to lift interest rates as early as next week.
Three-year bond yields rise when rate-hike expectations increase, because traders sell existing bonds at lower prices (bond prices move inversely to yields) in anticipation that new bonds will soon offer more attractive returns.
If the RBA does hike the cash rate to 4.1% next Tuesday – as is the forecast from NAB and Westpac – we’re likely to see mortgage costs rise as the banks pass through the higher cash rate. It would be the second round of mortgage repricings in as many months after the banks passed through February’s rate hike.
Read more: Commonwealth Bank, Westpac hike fixed rates as inflation overshoots
In the end, it all points to one uncomfortable reality: Australian mortgage holders are at the mercy of foreign leaders playing war games in far‑off places.
As Dhar said: “This is yet another example of geopolitics clashing with economics in this new era. This adds a wildcard element to the outlook.” At least it fits nicely with the wildcard in the White House.
