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Metrobank US-Iran Risk Index: Dire straits
The struggle to reopen the Strait of Hormuz continues.
By Metrobank Research, Investment Counselor Department
Metrobank’s US-Iran Risk Index settled at 144.9 at the end of last week, April 3. Take note that US equity and commodity markets were closed on that day, while the US bond market had a half-day trading day in observance of the Good Friday holiday.
Global oil prices had settled slightly lower in the latter half of last week following its spike on Tuesday. While market players were somewhat calmed by US President Donald Trump’s claim that the war would end soon, the lack of clarity on the reopening of the Strait of Hormuz, a critical transit point for global oil shipments, kept oil prices elevated. Brent crude closed at USD 109 per barrel during its last trading day on April 2, according to data compiled by Bloomberg.
Moreover, the US dollar continued to strengthen, as uncertainties fueled safe-haven demand for the greenback. Meanwhile, inflation concerns pushed US Treasury yields upwards during the US bond market’s half-day trading session on April 3.
Over the weekend, Trump threatened to unleash devastating attacks on Iran if the Strait of Hormuz stayed closed by Tuesday, according to Al Jazeera. Iran responded by threatening further retaliatory attacks, according to the BBC. Even with Trump affirming a swift resolution to the conflict, these sharp escalations will likely keep market players on the edge, as chances for the strait’s reopening continue to dim.
Metrobank still expects upside oil pressure, as global oil supply remains constricted. We also expect the Bangko Sentral ng Pilipinas to raise their policy interest rate this year to combat rising inflation. Lastly, we see the dollar-peso remaining elevated in the near-future, as the dollar continues to strengthen on safe-haven demand.
Metrobank’s US-Iran Risk Index measures the amount of risk that the ongoing conflict presents to financial markets. It considers the general risk sentiment of investors and inflationary pressure brought by the conflict. A value of 100 denotes a normal level of risk based on market levels prior to the conflict’s escalation, while values greater than 100 imply increasing levels of risk.
What now?
| Asset Class | Outlook | Strategy |
|---|---|---|
| Local Fixed Income | Bearish | Stay defensive on duration amid elevated foreign exchange volatility. Focus on liquid 2–5-year tenors and add only on pronounced yield spikes. Avoid extending duration, especially at the long end of the yield curve, until peso conditions and global risks show clear signs of stabilization. |
| Local Equities | Bearish | Expect bargain hunting of cheaper names in the near term. However, gains may remain capped amid oil-price volatility and developments in the Middle East. Buy on dips and take profit during rallies. |
| Global Fixed Income | Bearish | Stay in high-quality bonds in the 2- to 5-year sector as the defensive play despite easing geopolitical tensions. Yields may stay rangebound for the week, as global markets stay tuned in for further news. |
| Global Equities | Neutral | Maintain a defensive approach by prioritizing high-dividend sectors while taking advantage of volatility to accumulate select quality-growth names. |
| USD/PHP | Rangebound | Buy US dollars on dips or near the 59.85-60.15 support levels, as short-term fundamentals favor a mildly firmer USD after the US Federal Reserve (Fed) maintained its policy. Still, elevated energy prices and geopolitical risk will provide demand for USD. The market is expected to trade on headlines, as well as the release of Philippine inflation data for March this week. |
| G10 Currencies / US Dollar | Bearish | Major currencies EUR, GBP, and JPY see some recovery following their respective central banks’ decision to pause. However, inflation concerns driven by higher-for-longer oil prices continue to weigh on global growth prospects, weakening G10 economies dependent on energy imports while safe-haven trades favor the USD. |
| Gold | Slightly Bearish | Consistently elevated oil prices have driven hotter US inflation and delayed Fed rate cut expectations, contributing to a stronger US dollar and lower gold prices. The precious metal dropped by 12% throughout March and remains at USD 4,600 to USD 4,700 levels. The unpredictability of the situation, re-escalation of the conflict, higher oil prices, and a potentially more hawkish Fed may bring gold lower to our target entry levels of USD 3,800 to USD 4,200. Our long-term view is still for gold to outperform as global central banks diversify their reserve assets away from USD and US Treasuries. |
(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)