The price for oil and gas is giving in: financial markets are reacting euphorically to the two-week ceasefire between the US and Iran. During this time, there will be free travel for ships in the Strait of Hormuz and an agreement will be negotiated through Pakistan.
Whether this will work or whether the joy of the stock markets will soon die again remains to be seen. But two things are already clear: On the one hand, it turns out that the so-called Taco trade always works in the end. On the other hand, China in particular is likely to emerge as the big winner of this conflict, as its currency may play a much bigger role in commodity trading in the future.
Taco stands for “Trump always chickens out,” meaning Trump always buckles. With the abbreviation, investors describe the phenomenon that the US president always makes a radical U-turn when the reaction of the financial markets to his policies becomes too negative. The best example came up almost exactly one year ago: After Trump’s announcement of drastic tariffs on almost all trading partners, stock prices plummeted significantly. Finally, Trump suspended the measures for 90 days, markets recovered quickly and tariffs were usually lower in the end.
Investors hope that the Iran war is no exception to this rule, which now seems to be becoming true. The last-minute deal with Iran once again proves the Taco traders right. This time, however, it was not so much the stock market prices that may have promoted Trump’s withdrawal, but above all the price of oil. For the US, this compromise was necessary primarily in terms of domestic policy in order to alleviate the massive pressure on the fuel pumps.
But this does not resolve the conflict. The announcement of the “immediate” opening of the Strait of Hormuz is logistically a Herculean task. Currently, more than 1,000 ships, including more than 400 oil and gas tankers, are waiting on both sides of the strait. These must first be maneuvered through the eye of the needle.
The question then is how things will continue after that, as it isn’t certain the fighting will resume in two weeks.
Shippers and insurers will be reluctant to send new capacity to the region as long as it is unclear whether Iran effectively controls the passage through “technical restrictions or new transit charges.” Therefore, the price of oil is likely to remain significantly higher, even if there is an agreement.
Above all, however, it is unclear how an agreement between the US and Iran will be reached in the coming two weeks.
For example, Iran is demanding that permission for uranium enrichment and demanding that all US sanctions be completely lifted.
Reparations for war damage are also on the list of claims. It is hard to believe that the US agrees to these demands. The chances of success of the talks therefore remain limited.
But even if it comes to a deal, the winner of this conflict is likely to be China, that Trump certainly doesn’t want to see in that role.
China’s geopolitical and monetary power has been significantly strengthened in recent weeks.
Officially, the ceasefire was brokered by Pakistan. But Pakistan is an old enemy of India, another enemy of India is China, and true to the motto “The enemy of my enemy is my friend,” there have been close ties between China and Pakistan for years. Therefore, many believe that China was at least involved in the background.
At the same time, the crisis is playing into Beijing’s hands. This has reminded many states of the dangers of dependence on fossil fuels. This reinforces the need for energy independence and the increased demand for electricity. In this area, however, Chinese industry is leading the way, whether it’s production equipment -- solar panels or civil nuclear power -- or electric vehicle consumption. The energy transition is likely to accelerate globally and that benefits China’s economy. At the same time, however, the role of the Chinese currency in fossil fuel trade is also likely to be strengthened. In recent weeks, Iran has allowed individual ships to pass through the Strait of Hormuz -- provided they pay fees in Yuan.
In the future, at least China is likely to be given the opportunity to pay for raw materials in its own currency and perhaps other nations that the US sees as adversaries will join in. “This is crucial for Beijing in its quest for leadership,” says E. Artaz, fund manager at investment firm LFDE. This would actively undermine Beijing’s role as a global trading currency and bring it closer to its goal of enforcing the Yuan as a reference currency. “This is a lengthy process,” says E. Artaz, but it could be accelerated by a war with Iran and the resulting consequences.
By Peter Trankner