Vipin Malik is the Chairman & Mentor, of Infomerics Ratings while Sankhanath Bandyopadhyay is the Economist, of Infomerics Ratings.
The geopolitical tension remains one of the major worries including those in the Middle East and Ukraine. While these conflicts have not had larger impact, especially initially feared of adverse oil price implications, they have caused increased growth instability and volatility in commodity prices. Furthermore, uncertainties surrounding the US elections could have global economic implications.
The expanding conflict in West Asia has become intense after Iran’s first direct attack on Israel after an airstrike by Tel Aviv on the Iranian embassy killed some Iranian officials. According to media reports, the Iranian strikes were retaliation for the bombing of an Iranian diplomatic building in Damascus on 1st April’24 by Israel, that marked the first time the Islamic Republic has launched a direct assault on Israel. Yemen’s Iran-backed Houthi group has already disrupted global trade with attacks on shipping in the Red Sea.
There was an initial downslide of the Asia-Pacific markets. Brent crude futures was trading 0.14 per cent down at $90.32 per barrel, whereas US West Texas Intermediate Futures was down 0.32 per cent at $85.39. Japan’s Nikkei was down by 0.74 per cent, clipping some losses, closed at 39,232.8, while the broad-based TOPIX was down 0.23 per cent at 2,753.2. The Australian market, S&P/ASX 200 has experience a smaller loss compared to the other Asian markets, down 0.46 per cent at 7,752. As reported by CNBC, South Korea’s Kospi slid 0.42 per cent to finish at 2,670.43, while the small-cap Korean Securities Dealers Automated Quotations (KOSDAQ) dropped 0.94%, closing at its lowest level since Feb. 13.
Investors sentiments remain subdued in the Indian stock market, the 30-share BSE benchmark Sensex and the NSE Nifty declined by 845 points and 241 points on 15th April 2024, respectively. Except Maruti, Nestle India, Sun pharma, most stocks have realised losses. Amid the uncertain geopolitical landscape, the gold prices have skyrocketed as people are resorting to safe haven.
Iran produces 3.2 million barrels per day (bpd) crude oil with considerable command over the strait of Hormuz, the world’s most crucial oil chokepoint that connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Iran maintains significant military power in the region and can unsettle shipping through the Strait if it chose to. This accounts for thirty per cent of oil transit and seventy per cent of oil shipment to Asia. However, so far, the oil price impact remains benign.
Nevertheless, oil futures saw an increase on 6th May 2024, following Saudi Arabia’s decision to raise June crude prices for most regions. Worries developed over the possibility of a ceasefire agreement in Gaza, leading to renewed fears of potential escalation in the oil-rich region due to the Israel-Hamas conflict. Brent crude futures rose by 43 cents, or 0.5 per cent, to $83.39 per barrel at 1300 GMT, while U.S. West Texas Intermediate crude futures climbed to $78.62 per barrel, up by 51 cents, or 0.7 per cent.
According to the World Bank’s Commodity Market Outlook (CMO) in April’24, increased tensions in the Middle East have created tension on prices for major commodities, especially oil and gold. Copper prices have also increased, indicating supply worries. In early April’24, the price of Brent oil reached $91 per barrel (bbl), $34/bbl above its 2015-19 average. Gold prices have already skyrocketed, and likely to escalate around $2,350 per ounce in 2024, followed by a significant 40% surge to $2,875 in 2025. According to the World Gold Council (WGC), the LBMA (PM) gold price averaged a record US$2,070/oz in Q1 – 10% higher y/y and 5% higher q/q.
Going forward, geopolitical tensions, volatility in international financial markets, geoeconomic fragmentation, extreme weather events remain major roadblocks in the growth path of the Indian economy. Nevertheless, India remains the brightest spot globally despite such challenges.
Some remarkable development has happened like JP Morgan declared India’s inclusion in its Global EM Bond Index. Soon after, in March 2024, Bloomberg made its own announcement of India’s inclusion into its EM Local Currency Government indices. Moreover, in March 2024, most high-frequency economic indicators reflected robust and resilient business activity. In March 2024, the HSBC India Manufacturing PMI surged to an impressive 59.2, a notable increase from the final figure of 56.9 recorded in the previous month, driven by robust demand.