Q+A: Middle East conflict, AI and inflation: where markets go next
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Sean Aylmer. For much of this year, markets have been buffeted by conflict in the Middle East, concerns about global growth, shifting interest rate expectations and the relentless rise of artificial intelligence. But with some of the noise beginning to quieten, where do markets go from here? And how do investors make the most of it? Remember, this is general information only and you should always seek advice tailored to your circumstances before making any investment decisions.
How has the Middle East conflict affected global markets?
Shane Oliver is Chief Economist and Head of Investment Strategy at AMP. Shane, welcome back to Fear and Greed Q&A. Thank you, Sean. Great to be here. So the Middle East has overhung the markets for a long while. Where we stand today, which could be different from tomorrow, admittedly, has the market priced it correctly, do you think? Probably.
I think from the get-go, the market reaction has been fairly mild. So what we're talking about here is quite a significant disruption to the stratiform moves. 20% of oil and gas on a daily basis normally flows through that straight. There were some diversions. which maybe get you back to a 10% to 15% disruption. Of course, we've been able to get by globally by running down reserves so far. So that's why we haven't seen a lot of pain, despite a lot of talk about it. But if it stayed closed, then that would have been catastrophic globally. So I think markets, right from the get-go, who've sort of taken their cue from Donald Trump, they've learned from last year, Donald Trump likes to taco, Trump always chickens out.
And so consequently, markets have always been allowing for this possibility that he would chicken out and there would be some sort of deal. uh even though a lot of those he said oh the war's nearly over uh they want to talk to us this has been the message almost yeah regularly over the last few months now uh a peace deal is imminent we're going to sign it on the weekend oh whoops no but take a bit longer but the markets i think have been generally right to price that in and he's basically confirmed as much he said he had to back down because uh otherwise we'd have a global recession And so I think markets basically have got it right. And right now, like as we're talking, we're $75 West Texas, about $78, $79 Brent.
That's about $10 above where we were before the war started, still higher than it was earlier this year. But it's sort of not a catastrophic outcome and it's still allowing this possibility that, yes, there will be a peace deal and the oil will continue to flow through the Strait of Hormuz, which it's started to pick up. So I think markets have generally been right. Where it could all fall apart, of course, is... We're now into a couple of months of talks. It's quite easily the case that this could fall apart. But I think markets still have this faith that Trump will deliver and that ultimately he will back down.
What about the idea that the market has focused so much on whatever Donald Trump has said, it hasn't thought enough about inflation? And we are, obviously, they're connected. Oil prices, energy prices are connected to inflation. We now see the Federal Reserve probably with a bias towards lifting rates, not cutting rates. Has the market paid enough attention to inflation?
Well, I tend to think not. I mean, if I'm just looking at the market in the context of the way I've looked at it for the last 30 or 40 years, then I would say share markets are overvalued, particularly when you look at where bond yields are. You're getting paid a very low risk premium. And I've been surprised at the resilience of markets. both in terms of what's gone in the Middle East, the impact of the tariffs, the inflation scare, because what's happening here in the US, it's a bit worse there than it is here. But basically, you've had a supply shock coming out of the pandemic. That was made worse by Ukraine. A few years later, we get the tariff shock in the US.
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