James Brodie
Head of Learning & Development, Flux
Yields Higher on Energy Crisis, Funds Drawdown, Straining Credit Channels
Markets wake to energy shock as Hormuz closure disrupts supply chains; yields rise, equities fall, and systemic risks ripple globally.
Yields break higher as Wall Street wakes up to the energy crisis.
CPI came in line but was irrelevant, for the next 6 months inflation will print higher on the oil price flow through, yields jumped continuing their trend higher, bonds fell, equities fell as the market finally starts to wake up. Remember it took 6-week for the financial markets to realise there was a global pandemic back in 2020. 2-year yield breaks above key resistance at 3.63% (Chart 1, Bloomberg) and S&P 500 closed below key support 6,790. The dollar continues it’s rally while precious metals flatline as funds derisk.
The OPEC oil embargo of 1973 lasted six months. Yet the inflationary effects of that six-month embargo were felt for the rest of the decade.
The largest SPR release in history has no impact on the oil price. The 400 mio barrel release barely covers what has already been lost, and the reality is the flow rate of this SPR release is just 2mbd, against the current supply chain shock of at least 10 mio bpd.
US officials say Iran has laid mines in the Strait of Hormuz, per WSJ. Also, Iran hit three ships in the Strait of Hormuz. How can the US reopen the Straits of Hormuz without negotiating a ceasefire?
Chinese government bans refined fuel exports in March "with immediate effect", sources say, Reuters. China fuel export ban applies to gasoline, diesel and aviation fuel, sources say
Key Facts
- The Strait of Hormuz has been closed for 8 days.
- Around 20 million barrels/day of crude oil normally pass through the strait.
Sulfur & Industrial Chemicals
- 92% of the world’s sulfur is produced as a by-product of oil and gas refining.
- Closing Hormuz therefore disrupts the feedstock supply for sulfur production.
- Sulfuric acid, made from sulfur, is the most produced chemical on Earth.
- Sulfuric acid is critical for extracting key metals such as copper and cobalt.
- These metals are essential for transformers, EV batteries, and data-centre electronics.
Semiconductors & Energy
- Qatar supplies ~30% of Taiwan’s LNG, much of which transits Hormuz.
- Taiwan has roughly 11 days of LNG reserves.
- TSMC produces ~90% of the world’s advanced semiconductor chips.
- TSMC alone consumes about 8.9% of Taiwan’s electricity.
- If LNG flows stop → power shortages → semiconductor production risk.
Food Supply
- About 33% of global nitrogen fertilizer feedstock moves through the Strait of Hormuz.
- Synthetic nitrogen fertilizers support roughly half of the world’s population’s food supply.
Systemic Risk
- Three critical global supply chains depend on Hormuz:
- Sulfur / industrial chemicals
- Semiconductors
- Fertilizer / food production
- All rely on a 21-nautical-mile chokepoint with no large-scale alternatives.
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5y inflation breakeven rate at a one-year high and heading higher. (Chart 2, Bloomberg|)
Hedge funds are shorting stocks at the "highest level" since 2022. Hedge fund short positions in US macro products, including index futures and ETFs, are up to 11% of total US exposure, the highest since the 2022 bear market. (Chart 3, Goldman Sachs). Plus, investors are currently holding the largest dollar amount of S&P 500 put options in HISTORY, per JP Morgan
Hedge funds suffered their worst drawdown since April as market volatility linked to the middle east conflict unwound crowded trades, according to JPMorgan.
Morgan Stanely joins the growing list of institutions limiting private credit fund redemptions, including JP Morgan, Blueowl, Blackrock, Blackstone & Cliffwater.
S&P has warned that the Middle East conflict is beginning to strain credit channels across multiple sectors.
Deutsche Bank has lowered its growth forecast for Germany this year from 1.5% to 1%.
The Dubai real estate index just collapsed 27% in 10 days.
Euro zone money markets now fully price in ECB rate hike by July
Data today – weekly jobless claims.
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