Iran-Israel explosion blows Asia’s Fed hopes asunder

Anyone laughing at Lawrence Summers for predicting that the US Federal Reserve’s next move may be a tightening, rather than loosening, is rather quiet now.

The former US Treasury secretary turned many heads with that contrarian pronouncement last week. In the 48 hours since Iran rained fire on Israel, many Fed forecasts have likely been blown to bits.

On top of that, the Organization of the Petroleum Exporting Countries cartel continues to keep a tight lid on oil production, causing Citigroup and others to foresee US$100 per barrel oil on the near-term horizon.

Together, all this suggests global inflation is likely to heat up as the year progresses, dashing certain hopes that prices might have peaked.

“What is not priced into the current market, in our view, is a potential continuation of a direct conflict between Iran and Israel, which we estimate could see oil prices trade up to +$100 per barrel, depending on the nature of the events,” notes Citi analyst Max Layton.

That, in turn, reduces the odds of Fed rate cuts in ways that imperil Asia’s economic outlook in 2024.

“In a worst-case scenario, a forceful retaliation by Israel could trigger a spiral of escalation, potentially leading to an unprecedented regional conflict,” says Jorge Leon, senior vice president at Rystad Energy. “Under such circumstances, geopolitical premiums would increase significantly.”

This would quickly alter the calculus in China, Japan, South Korea and economies throughout Southeast Asia.

It’s not just crude oil but also upward pressure on other vital commodities ranging from precious metals to coffee to cocoa. In the context of asset markets, the jumps in prices for copper, gold and other goods are raising particular alarm.

“Any rise in oil