Creating a bit of a stink

Price pressures for fertiliser could create a global food crisis.

Three weeks into the war in the Gulf and there is a deepening impression that Trump has entered the US into a conflict with no clear aims or strategy.

Trump is under mounting pressure at home. His voter appeal is waning as nearly half of Americans hold him responsible for the surge in gasoline prices triggered by the US war with Iran. Trump must find an exit ramp to avoid pain in the midterm elections in November.

Meanwhile, the world must deal with the economic fallout from the conflict and the closure of the Strait of Hormuz to shipping. While attention has focused upon oil and gas prices, a number of industries are watching the price of sulphur, which has jumped by 35% since the start of the conflict. The surge has exposed the fragility of supply chains that are built around the Gulf, which accounts for 45% of the world’s sulphur exports. Sulphuric acid is used in leaching to separate and recover metals such as copper, nickel and uranium. The disruption to sulphur supplies through the Strait of Hormuz is expected to have an impact on copper production. Semiconductor manufacturers also use sulphuric acid to clean wafers.

However, there is now a growing risk that the conflict could escalate and create a global food crisis.

The fertiliser industry is the biggest user of sulphur, accounting for 60% of demand, while there have also been price spikes in urea and ammonia, which are both critical ingredients of fertiliser. A prolonged conflict and ongoing disruption to Gulf shipping would feed into higher food production costs and inflation. The conflict in the Gulf comes as peak fertiliser season approaches.

It was not that long ago that global supply chains faced disruption from attacks on shipping in the Red Sea by Iranian backed, Yemen-based Houthi rebels. While attention remains focused on the Strait of Hormuz, the world’s economy and global supply chains also remain at risk from disruption to shipping in the Bab al Mandab Strait off Yemen. This accounts for 12% of global oil tanker traffic.

The world is still hoping for a swift resolution to the crisis in the Middle East, as a prolonged conflict would be very painful indeed.

 

What have we been watching?

 

Another nervous start to the week for markets as events in the Gulf risk escalating further. Has Trump bitten off more than he can chew? Last week, all four central banks – the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan – kept interest rates on hold and markets sat on their hands watching developments in the Gulf. However, market expectations have rapidly shifted from anticipating interest rate cuts from some of the central banks to fearing the possibility of interest rate hikes.  

Market sentiment improved late last week as Trump said he was considering ‘winding down’ military operations and suggested that responsibility for policing the Strait of Hormuz would be transferred to other countries. However, over the weekend, Trump posted on Truth Social that Iran must ‘fully open, without threat, the Strait of Hormuz within 48 hours from this exact point in time.’ He warned that failure to do so would result in the US ‘hitting and obliterating’ Iran’s power plants. Iran responded by saying it would not only close the Strait of Hormuz but also target ‘all energy, information technology and desalination infrastructure belonging to the US and the Israeli regime in the region.’

 

Increased risk aversion has seen global government bond yields rise. The US 10-year Treasury yield climbed above 4.38% at the end of last week and has nudged higher this morning. The last time that the US Treasury yield hit this level was following Trump’s Liberation Day tariff announcement and the Greenland spat. On both occasions Trump did blink, so if the US Treasury yield becomes entrenched around these levels will it influence Trump’s actions in the Gulf and influence the length of the conflict with Iran? As we write Trump has just posted on Truth Social saying that following ‘good and productive conversations regarding a complete and total resolution of hostilities’ that he has ‘instructed the Department of War to postpone any and all military strikes against Iranian power plants and energy infrastructure for a five- day period.’  

Iran’s Foreign Ministry has subsequently issued a statement saying ‘We deny what President Donald Trump said regarding negotiations taking place between the US and Iran.

 

In the UK, PM Sir Keir Starmer is holding a ‘Cobra’ emergency meeting to discuss the cost-of-living crisis and the rise in energy prices. Energy consultancy Cornwall Insights has forecast that a typical annual household energy bill in the UK could go up by 20% in July. Clearly this would not be good for the economy or the inflation outlook. Markets have already moved in a little under three weeks from expecting two interest rate cuts of 0.25% in 2026 by the Bank of England to over 0.75% of rate hikes! Equally bad news for Chancellor Rachel Reeves is that the conflict in the Gulf has pushed government bond yields higher. The UK 10-year Treasury yield climbed to almost 5% last week, the highest level since 2008!            

Read our latest investment insights from Alpha PM

 

Brent oil opened above $113 this morning following Trump’s comments over the weekend but has fallen 12% to $98 following his latest post to halt attacks on Iran for a five-day period.

Finally, as part of an anti-counterfeiting move and following public consultations, the Bank of England intends to depict British wildlife on its next set of £5, £10, £20 and £50 notes. This has already sparked a backlash from some politicians, with Reform’s Nigel Farage calling the decision to replace Sir Winston Churchill with a picture of a beaver ‘absolutely crackers’. However, will the Bank of England take note?

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