Australian equities are positioned for moderate gains on the back of steadier Wall Street trading, but the resilience is fragile as geopolitical tensions in the Middle East continue to ripple through global energy markets.
Oil prices have swung wildly, soaring as much as 32 per cent to $119 per barrel before plunging around 5 per cent to $86 per barrel after Trump told CBS News the war in Iran was "very complete, pretty much." This volatility underscores how tightly crude movements are tied to expectations about conflict duration rather than fundamental supply data.
For Australian investors, the headline story is reassuring on the surface. Australia's S&P/ASX 200 closed more than 1 per cent higher as markets rebounded from Monday's worst selling. Yet this recovery masks deeper concerns about stagflation: the unwelcome combination of rising prices and slowing growth that central banks find hardest to manage.
The core risk remains the Strait of Hormuz. Shipping through the crucial Strait dropped 95 per cent in the first week of March, according to S&P Global Market Intelligence, with about one-fifth of the world's oil coming through the strait. If the closure persists beyond a few weeks, Australian households will feel it at the service station and supermarket shelf. Australia imports more than 90 per cent of the fuel we use, and it is priced in US dollars, so the exchange rate matters as much as the oil price.
The Australian dollar's behaviour has been peculiar. The Australian dollar gave up the 0.70-handle at the start of trading this week minus 0.6 per cent, and is surprisingly holding in well against these wider market moves. This relative strength belies the longer-term inflation story: even if oil prices settle, a 10 per cent depreciation in the Australian dollar typically translates to 15 to 20 cents per litre increase at service stations, even when international oil prices remain stable.
Wall Street's ability to absorb the shock has bought Australian markets some breathing room. The three major averages rebounded on Monday afternoon, coming back from sharp losses to close in positive territory, as the S&P 500 made a comeback after President Donald Trump said the war against Iran could be reaching its end, with the broad market index rising 0.83 per cent. However, strategists warn this comfort is conditional. Current market pricing reflects an expectation of a short-term disruption lasting a few months, rather than a sustained elevation in prices throughout the year, attributed to the absence of reports indicating significant, long-term damage to oil infrastructure.
The Australian economic outlook depends on three variables: conflict duration, infrastructure damage, and the Reserve Bank's policy response. A three-month disruption could see consumer price inflation temporarily spike by around 1.5 percentage points at its peak, with GDP 0.5 percentage points lower by the end of 2026. That is manageable if temporary. It becomes corrosive if prolonged.
For now, markets are pricing in military resolution rather than enduring conflict. Whether that assumption holds depends entirely on developments in the Middle East beyond Australia's control. ASX gains today likely reflect relief rather than conviction.