Markets call Iran’s bluff on Strait of Hormuz closure as gold, oil and shares trade in cynical range

The Australian sharemarket has pared its opening losses as markets bet an impotent Iran won’t close the world’s key shipping route. Gold slides, and Wall Street futures are telegraphing a small decline, for now.

The ASX has dropped as war escalates in the Middle East. Picture: Jeremy Piper/NewsWire

Investors are unconvinced Iran is capable of following through on its threats, including to close the Strait of Hormuz where almost a quarter of the world’s oil passes through, if the modest falls in global shares are to be believed.

Australia was one of the first markets in the world to react to the escalating war in the Middle East but the decline in gold, and US equity futures paring their losses, indicates traders are betting Iran will not resort to the extremes it has vowed.

Jaded investors describe blocking the Strait of Hormuz as Iran shooting itself in the foot.

The price of gold popped following operation “Midnight Hammer” where the US deployed aircraft and precision-guided weapons to target three Iranian nuclear facilities over the weekend. But the yellow metal turned negative, down 0.3 per cent to $US3357.97 an ounce. US futures moved in the same direction, recovering from an expected loss of 0.7 per cent to pricing in a shallower 0.2 per cent Wall Street loss.

The local S&P/ASX 200 and the All Ordinaries lost 0.4 per cent, clawing back an earlier 1 per cent kneejerk drop led by declines in mining, banks and technology stocks.

Crestone head of public markets Todd Hoare predicted a ‘buy-the-dip’ mentality would rule if the war broadens.

“Our strategy at the moment is to sit tight, to not react to any of this. Our gut feel is that if it does escalate from here, you may get a three to six-month window where equities are volatile and can trade a bit lower but ultimately (if you look at past geopolitical crises) it’ll end up being a buying opportunity,” he said.

Schroders’ head of multi-asset Sebastian Mullins said investors seem more concerned when Donald Trump and Elon Musk trade barbs on social media.

“The market is uncomfortably numb about these issues now, whether it’s tariffs or war in the Middle East. The market’s now waiting to see what action comes from Iran. If they do block the Strait of Hormuz, that would obviously hurt the oil price which would then push inflation higher... but the market is calling Iran’s bluff here,” Mr Mullins said.

“All up, 80 to 90 per cent of their own exports go through that Strait. So if they close it, they’re shooting themselves in the foot.”

Investors are selling Australian shares after the US bombing of Iran. Picture: Gaye Gerard/NCA NewsWire

RBC Capital Markets speculated Iran may strike strategic energy infrastructure rather than attempt a full closure of the shipping route, which controls a fifth of the world’s oil supply.

While Iran’s parliament has voted to close the Strait of Hormuz, such a tactic may prove difficult given the position of the US Navy’s Fifth Fleet in Bahrain.

Instead, Iran may choose to strike individual tankers and key ports testing the “energy tripwire” of US President Donald Trump and the reaction of oil markets.

“We have already heard reports of substantial Iranian jamming of transponders in and around the Strait, causing QatarEnergy as well as Greek and British maritime shipping authorities to issue warnings about navigating those waters,” RBC’s Helima Croft said.

“In the current environment, Iran may not have to do a very complex operation to cause companies to avoid the Strait. Hence, we do not believe it is a ‘full closure or nothing’ scenario when it comes to the waterway, and Iran may deploy their asymmetric capabilities to raise the economic cost of the combined US/Israeli operations.”

RBC cited Washington sources who said Iran retains enough short-range missiles to attack Gulf energy facilities and regional US bases.

An added complication is Iran’s normalisation of relations with its traditional Gulf rivals Saudi Arabia and the UAE which may immunise its neighbours.

Oil benchmarks jumped to the highest level since January after the US bombed the Iranian nuclear facilities.

Both West Texas Intermediate and Brent rallied; Brent is currently trading up 2.4 per cent to $US78.85 a barrel, while WTI is up 1.1 per cent to $US75.73.

MST Marquee analyst Saul Kavonic on Sunday predicted the price of oil could ultimately spike to $US100 a barrel.

“Much depends on how Iran responds in the coming hours and days, but this could set us on a path toward $US100 oil if Iran responds as they have previously threatened to,” the energy analyst said.

Oil and gold prices are rising. Picture: Timothy A. Clary/AFP

GSFM Funds Management investment adviser Stephen Miller said markets looked too optimistic and were priced for a scenario that is improbably benign.

“If the US and Iran come to, let’s call it, an uneasy accommodation, then you could perhaps justify that limited reaction we’re seeing. Given the continuum of outcomes that are possible, I think markets are priced for a very optimistic end of a benign set of outcomes,” he said.

Mining and industrials led Monday’s decline as financials recovered through the session.

BHP and Fortescue were off more than 1 per cent through the day, while Rio Tinto was down 0.3 per cent.

After dropping more than 1.5 per cent in intraday trade, ANZ finished the session down 0.6 per cent to still be the weakest of the big four banks after UBS slapped a sell rating on the stock. NAB was little changed, Westpac rose 0.6 per cent and CBA gained 1 per cent.

The energy sector gained 0.13 per cent with Santos up 1 per cent and Woodside flat, while Transurban, Brambles and Qantas all ended in the red.