Back to square one

The deterioration in the Middle East is becoming increasingly difficult for markets to ignore.

Tanker traffic through the Strait of Hormuz has fallen back to almost zero, compared with roughly 80 daily crossings before the conflict. Hopes for a rapid normalization have also disappeared: prediction markets now assign virtually no chance to traffic returning to normal by the end of July.

The risk is no longer limited to the Persian Gulf. Renewed pressure on the Bab el-Mandeb Strait could also disrupt Saudi oil exports and force container traffic between Europe and Asia to avoid the Suez Canal and reroute around the Cape of Good Hope.

Despite these developments, equity markets remain resilient. Investors appear to believe that sharply higher oil prices will ultimately impose discipline on all parties, as the economic and political costs of further escalation become increasingly difficult to absorb.

That assumption may be reasonable, but it leaves little room for error. Brent crude is again trading above $90, strategic inventories have already been reduced, and attacks are extending beyond purely military targets.

The key question is therefore no longer whether the conflict is damaging. It is whether markets are placing too much confidence in the idea that economic pressure will automatically bring it back under control.

Are investors underestimating the risk that the conflict becomes more difficult to contain?