For the past year and a bit, since Donald Trump came back into office, traders have pushed markets higher on the hopes of an AI-powered economic miracle and the TACO trade — Trump Always Chickens Out.
After feeling queasy, perched on a wall of worry over the weekend, many traders spat their tacos out as soon as possible on Monday morning.
Their unease stemmed from increasing signs that, far from chickening out, Mr Trump and Iran’s leaders were beefing up their rhetoric and actions.
Iran war live updates: For the latest news on the Middle East crisis read our blog.
Over the weekend Iran doubled down on its hardline Islamist regime by appointing Mojtaba Khamenei to replace his father, Ayatollah Ali Khamenei, as supreme leader, while the US president doubled down on his promise to destroy it.
“Iran is no longer the “Bully of the Middle East,” they are, instead, “THE LOSER OF THE MIDDLE EAST,” and will be for many decades until they surrender or, more likely, completely collapse! Today Iran will be hit very hard!” Trump said in a Truth Social post.
Combined with further attacks on oil and gas facilities, a continued blockage of the crucial shipping channel through the Strait of Hormuz, and announcements from several Gulf oil and gas producers that they were scaling back output as storage tanks filled up, it was more than enough to make share markets very sick.
Strategists say there will be plenty of pain to come. (ABC News: John Gunn)
Hundreds of billions of dollars wiped from Asian markets
Being one of the first to kick off trade this week, Australia led the way, slumping 2.7 per cent on opening.
The proximate cause was a historic one-day surge in crude oil prices — initially by more than 20 per cent to $US111 a barrel.
But then traders noticed that Trump had channelled his inner Tom Petty with another social media post rebutting any prospect of a backdown.
Donald Trump took to his social media platform to claim oil prices would fall once the “Iranian nuclear threat” was no more. (Reuters: Scott Morgan)
“Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace. ONLY FOOLS WOULD THINK DIFFERENTLY!President DJT,” Trump said on Truth Social.
That post, made around the time the local market opened, prompted further share price declines, while oil prices found another leg higher.
At its peak, Brent crude oil futures hit $US119.50 a barrel — a jump of 29 per cent from last week’s close of trade.
At its low point today the benchmark ASX 200 index had plunged more than 4.4 per cent to 8,457 points, wiping as much as $135 billion from the value of Australian stocks.
That would have been the worst one-day fall since the early stages of the COVID-19 pandemic in 2020, had it been maintained to the close.
Falling markets, falling rain. (ABC News John Gunn)
Other Asian markets, even more dependent on energy imports from the Middle East, were hit harder. Japan’s Nikkei slumped about 7 per cent, while Korea’s KOSPI plunged about 8 per cent, after at one point triggering circuit breakers temporarily suspending trade.
The Australian market mounted something of a recovery late on, finishing 2.85 per cent lower at 8,599 points, presumably as either brave or foolish so-called bargain hunters moved in.
Read more about the Iran war:’Quite terrifying’: Damage to global economy grows exponentially
Rabobank’s senior global strategist Michael Every believes a critical mass of traders are finally starting to appreciate the “quite terrifying” threat America and Israel’s Iran adventure poses to the global economy and the companies that rely on it for their profits.
“This is now starting to look like a potential combination of the 1973 post-Yom Kippur War oil shock, the 2022 Russia-Ukraine War commodity shock, and the 2020-21 COVID supply chain shock,” he warns.
“The longer this goes on, the more exponential the damage becomes, in a domino effect, which is exactly what oil is now showing to a market that saw some takes last week that ‘things could be a lot worse’. Well, now they are.”
Markets get the war in the Middle East all wrong
MST Financial energy analyst Saul Kavonic agrees that this could be just the beginning for rising oil and gas prices.
“I think the market is still expecting there will be a resumption of flows and some de-escalation over the coming several weeks,” he tells The Business.
“But if that doesn’t happen, then we need to see demand destruction-driven pricing. That means we need prices so high that large parts of the world can’t afford it and that implies prices much higher.
“And $US150 [per barrel]-plus pricing is very much a scenario on the cards, I’m afraid.”
AI can’t prosper without a physical economy
As Every points out, it’s not only oil and gas prices surging higher.
He notes there have been even more dramatic moves in diesel, jet fuel, fertiliser, key chemicals such as sulphur, and gases like helium, “without which not a lot moves in the industrial economy, grows in the agricultural economy, or is produced in terms of metals like copper and tech goods like chips”.
Iran attack’s impact on power prices
This is the threat posed to the other arm of the recent market surge, artificial intelligence.
Not only does it require vast amounts of energy to run — energy that is now rapidly becoming much more expensive — but it still requires a well-supplied manufacturing sector to build the physical hardware and a profitable economy to pay for its services.
The Iranian war is threatening all three.
And, even if the conflict ended tomorrow, the damage has reached a point where the disruption in global oil and gas supplies will be measured in months, not days or weeks.
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The oil fields, refineries and gas plants damaged won’t be fixed overnight, and those shut down because there’s nowhere left to store their output can’t be restarted with the flick of a switch.
That said, markets price the future and if there is a speedy end to hostilities, oil and gas prices are likely to drop quickly, even if actual supplies take longer to restore.
But only time will tell whether investors betting that Donald Trump isn’t willing to wage a long war against Iran will end up choking on their tacos.
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