So, the Strait of Hormuz should open any minute now. Oil prices should normalise and things should go back to normal. Is it too soon to put on our party hats?
While we hold out hope that all goes smoothly, there are still bumps in the road ahead and plenty of downside risk. The longer the peace deal holds, the more of a reality it becomes. But we can’t expect markets to wait around and see if things will stick. Markets want to get ahead of the news, so they will react quickly.
The price of Brent Crude was down to $87.3USD per barrel, the lowest since March 2026, before the peace deal was even confirmed. While the S&P 500 was rallying to new highs.
The full extent of the peace deal, with all the dirty details will be released on Friday (US time). Until then, markets will fill in the blanks on what the deal will entail. If the agreement turns out to be less favourable than anticipated, we are likely to see a bit of whiplash.
What we care about most is the effect this will have domestically across the motu. Assuming the Strait of Hormuz opens, and oil prices come down to pre-war levels (or at least very close to), we should be getting back to the business of that economic recovery. We left the recovery at the door when the war broke out, but there’s hope we can pick it back up and dust it off. The war lasted long enough to put a dent in business and consumer confidence, and send inflation expectations up. It may take a little while for the mood to lighten and confidence to return, but we are hoping that six months or less will be enough. That will take us to the start of 2027… just like the start of this year, and with less geopolitical risk… hopefully.
Although no one knows where Trump will strike next, we pray for at least a year of stability to get back to seeing some Kiwi growth. The RBNZ will be looking for this too, and an end to the war will be a double-edged sword. On one hand, inflation pressures form international sources will come down significantly. On the other hand, business confidence may rebound more strongly than we expect, putting a bit more heat back into the economy.
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