Another day, another tweet claiming the “special operation” in the region is going as planned and will be over soon, giving a boost to the S&P 500, the Dow Jones, and even gold (XAUUSD), which hasn’t been doing so well lately amid worries about the Federal Reserve turning more hawkish.
The problem is, the Strait of Hormuz is still blocked. That keeps energy prices high and also limits access to other key resources for the global economy, like nitrogen and phosphate fertilizers, sulfur, helium, and aluminum. Things could get even worse if Iran, in a further escalation, uses its allies to block the Bab el-Mandeb Strait too.
Before all this, about 20 million barrels of oil a day — around a fifth of the world’s consumption — passed through the Strait of Hormuz. If Bab el-Mandeb were also closed, the world could lose another 4.2 million barrels per day.
Overall, if Bab el-Mandeb were closed, it would basically paralyze the Suez Canal, which handles up to 12% of global maritime trade. We got a glimpse of this in 2021 when the Ever Given blocked the canal for six days. During that time, about $9 to $10 billion worth of goods per day couldn’t get through, with total disruptions hitting $50 to $60 billion in global trade. And that’s just the direct impact.
As of the ripple effect, supply chains were disrupted, factories in Europe and Asia faced delays getting parts, retailers struggled with shortages, and shipping costs rose, adding pressure to already high post-pandemic inflation.
If things take a turn for the worse and both straits end up blocked instead of just one, inflation risks would likely spike. That would probably push central banks to move beyond talk and actually tighten monetary policy, which would hardly help boost market confidence.
If, in turn, tensions ease and the Strait of Hormuz reopens, we could see the stock market jump sharply. But the bigger question is what happens after that. Even a short-lived disruption can leave lasting effects, and central banks will still have to grapple with them. So, after the initial rally, markets might start realizing that the global economic outlook hasn’t exactly improved.
It’s also worth remembering that even if things calm down now, there’s no guarantee tensions won’t flare up again down the road.