World shock

The first casualty of the potential closure of the Strot of Hormuz is South Korean stock market. In the top chart below you can see the correction of the KOSPI index since Friday. Today, it had to close temporarily as it hit the circuit breaker of 8% fall. One of the reasons for that fall is that 75% of South Korea oil consumption comes from Middle East. What’s interesting is that Hormuz is not physically blocked, ships can still go through it. The problem is financial. Insurers are subject to strict capital requirements when it comes to geopolitical risks, and Iran knows it. Major insurers have Increased premiums 3-5X, making it financially impossible to go through the strait. Trump has responded by ordering the U.S. Development of Finance Corporation (DFC) to provide insurance and even have the Navy escort ships along the strait. Now take a look at the chart on the bottom: if this is the reaction in South Korea and it’s sensitivity to oil is 5-6 times less than China and half of India, one can only imagine what can happen to those markets if the situation persists. Hubris plays an important role in this conflict. Iran has been preparing for years for this war, and the US has come to this conflict thinking it will be as easy as the Maduro extraction. And perhaps they are stating to realize it may take longer, and it may need boots on the ground, if a regime change is the ultimate goal. The world has just received a shock.

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