Citi's latest market commentary underscores oil and energy as the primary common denominator across various market risks. The Strait of Hormuz, identified as the world's most critical energy artery, facilitates roughly 25% of global seaborne oil and about 20% of global Liquefied Natural Gas (LNG) flows. Any sustained disruption in this chokepoint could directly lead to increased global oil and natural gas prices, subsequently raising nitrogen fertilizer and agricultural input costs worldwide. Major Asian importers such as China, Japan, India, and South Korea are particularly vulnerable to these disruptions, intensifying the risk of a significant surge in global food prices.
The duration and severity of ongoing conflicts, particularly those in the Middle East, will dictate the extent of these secondary effects. A prolonged period of elevated fertilizer and agricultural costs might prompt governments, especially in large agricultural economies, to offer fiscal support to farmers. This scenario also carries the risk of heightened food-price sensitivity and potential social unrest in nations heavily reliant on imported staples. Europe, now a major LNG importer, despite being less exposed to physical flows through Hormuz, remains highly sensitive to global LNG price benchmarks. A persistent price spike could weaken Europe's trade balance, increase power and industrial input costs, and potentially rekindle inflationary pressures.
In currency markets, extended conflicts typically result in underperformance among major energy-importing economies, including Europe, South Korea, India, Chile, and South Africa, as higher energy prices strain trade balances and impede economic growth. Conversely, currencies of key commodity exporters like Canada and Australia tend to exhibit relative resilience due to their positive terms-of-trade exposure. U.S. markets are seen as more resilient to heightened geopolitical risks due to their size, depth, and the U.S.'s growing net-export position in crude oil and liquefied natural gas, which cushions the aggregate economic drag during periods of high energy prices.
